Abstract
This paper analyzes how universal banks treat different groups of retail investors in new equity issues. Do banks take advantage of their retail investors to sell lemons or do their retail investors benefit from getting more of the issues? We provide evidence from a proprietary dataset to show that lead underwriter's retail customers demand more of the highly underpriced issues and less of the overpriced issues. As a result lead-retail investors end up with a higher allocation of underpriced issues. Thus, underwriters care about their retail customers who benefit from getting more of hot issues as opposed to lemons. One important reason for the favorable treatment, that we provide some evidence for, is the cross-selling potential from new brokerage accounts that customers have to open to subscribe to new equity issues.
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