Valuation Uncertainty and IPO's: Investment Bank versus Commercial Bank Underwriters

Abstract

This paper examines the microstructure trading characteristics of initial public offerings underwritten by commercial banks. The degree of asymmetric information present in the market for these issues is measured by the price impact of trades and the size of the bid-ask spread. If there is more uncertainty in the market about the value of issues underwritten by commercial banks, than these securities should exhibit a greater degree of asymmetric information in their trading environment than non-commercial bank underwritten initial public offerings. More uncertainty could be due to a perceived conflict of interest when commercial banks underwrite securities. Conversely, if the market believes that commercial bank involvement signals firm quality and provides additional information to the public, less asymmetric information will be present in the market. This topic has recently gained in importance with the passage of the Financial Services Reform Act in November 1999 and the inevitable move towards universal banking. We find that, when characteristics of the IPO are controlled for, trades in commercial bank underwritten issues exhibit significantly higher price impacts. This is consistent with greater uncertainty about the value of commercial bank underwritten IPO's and also consistent with the market perceiving a possible conflict of interest on the part of commercial banks.