Banking Syndicate Research Articles

IPO Pricing and Allocation: A Survey of the Views of Institutional Investors

Despite the central importance of investors to all initial public offering (IPO) theories, relatively little is known about their role in practice. This article is based on a survey of how institutional investors assess IPOs, what information they provide to the investment banking syndicate, and the factors they believe influence allocations. We find that investor characteristics, in particular brokerage relationships with the bookrunner, are perceived to be the most important factors influencing allocations, which supports the view that IPO allocations are part of implicit quid pro quo deals with investment banks. The survey raises doubts as to the extent of information production or revelation.

Ipo Pricing and Allocation: a Survey of the Views of Institutional Investors

Despite the central importance of investors to all IPO theories, relatively little is known about their role in practice. In this paper we survey institutional investors about how they assess IPOs, what information they provide to the investment banking syndicate, and the factors they believe influence allocations. Although the theoretical IPO literature has tended to focus on information revelation, the survey raises doubts as to the extent of incremental information production and whether bookrunners are, in practice, able to infer investors' valuations from their bids. We find that investor characteristics, in particular broking relationships with the bookrunner, are perceived to be the most important factors influencing allocations, which supports the view that IPO allocations are part of implicit quid pro quo deals with investment banks.

Prevention Is Better than Cure: The Role of IPO Syndicates in Precluding Information Acquisition*

We treat information acquisition by potential investors in initial public offerings as endogenous. With endogenous information, the critical question is why underwriters would allow investors to spend resources acquiring superior information intended solely to effect a wealth transfer. We show that an investment banking syndicate is an institutional arrangement designed to avoid such a transfer. By inviting rival banks to share in the offering, a managing underwriter ensures they have a strong incentive to remain ignorant. We characterize the resulting outcome as one of symmetric ignorance. The desire to maintain symmetric ignorance is consistent with the observed passivity of nonmanaging syndicate participants.

The Small World of Canadian Capital Markets: Statistical Mechanics of Investment Bank Syndicate Networks, 1952–1989

AbstractWe investigate the structure of investment bank syndicate networks in Canada. We consider two banks to be connected if they have participated in an underwriting syndicate together, and construct networks of such connections using data drawn from the Record of New Issues (Financial Data Group). We show that these interfirm networks form “small worlds”, in which banks are both locally clustered and globally connected by short paths of intermediate banks, and are “scale free”, in which the connectivity of the network is highly skewed and with most banks tied to a small set of prominent banks. We examine changes over time in the network's small‐world and scale‐free properties, and demonstrate their theoretical and practical implications for the structure and operation of Canadian capital markets by linking these properties to the network's cliquey‐ness, resilience, and speed of information transmission.RésuméCette étude porte sur la structure des réseaux que for‐ment les syndicats d'émission des banques d'investissement au Canada. Nous posons que deux banques sont liées si elles ont participé ensemble à un syndicat d'émission, et nous retraçons les réseaux de liens en utilisant des données extraites du Record of New Issues (Financial Data Group). Nous montrons que ces réseaux interorganisationnels (RIO)forment des petits mondes dans lesquels les banques sont à la fois localement regroupées et mondialement reliées par des courts chemins de banques intermédiaires. Les RIO sont également sans échelle (scale free): la connectivité dans le réseau est fortement inégale et la plupart des banques sont liées à un petit nombre de banques dominantes. Nous examinons l'évolution des propriétés de petit monde et d'absence d'échelle du réseau et mettons en Evidence leurs implications théoriques et pratiques pour la structure et le fonctionnement du marché canadien des capitaux en reliant ces propriétés aux caractères de clique, de résilience et de vitesse de transmission de l'information du réseau.

Competition and Coalition among Underwriters: The Decision to Join a Syndicate

ABSTRACTThis paper studies the decision of lead investment banks to organize hybrid syndicates (commercial banks participating as co‐managers) versus pure investment bank syndicates. The findings show that hybrid underwriting issues are more challenging to float. Compared to pure investment bank syndicates, hybrid syndicates serve clients that are smaller, have lower common stock rankings and less prior access to the capital markets, rely more on bank loans, and invest less capital but issue larger amounts, which indicates that commercial banks' participation enhances hybrid services. Moreover, lead investment banks tend to invite banks' participation when clients exhibit higher loyalty in reusing their services.

Does Stock Market Liquidity Matter? Evidence from Seasoned Equity Offerings

This paper presents empirical evidence that stock market liquidity is an important determinant of the cost of raising external capital. Because the role of an investment banking syndicate in a public security offering is analogous to that of a block trader, investment banks should charge lower fees to firms with more liquid securities. Using a large sample of seasoned equity offerings, we find that, ceteris paribus, investment banks' fees are significantly lower for firms with more liquid stock. We estimate that the difference in the investment banking fee for firms in the most liquid quintile versus the least liquid quintile, controlling for other factors, is approximately 107 basis points, which represents about 22.3 percent of the average investment banking fee in our sample. Our findings suggest that firms have an incentive to promote the market liquidity of their equity.

Research analyst conflicts of interest: Implementation of the rules

The National Association of Securities Dealers and the New York Stock Exchange recently have adopted and then amended new rules relating to research analyst conflicts of interest. However, open questions remain, and these two self‐regulatory organizations (SROs), in collaboration with the SEC, must provide further guidance on the application of these rules to various day‐to‐day situations such as an analyst receiving a customer inquiry concerning investment banking capabilities, a firm’s participation in an investment banking syndicate after the firm’s analyst has begun research coverage of the issuer, procedures for analysts to conduct due diligence, publishing research reports on an issuer while a firm is engaged in a distribution of the issuer’s securities, and analysts’ limitations during distribution quiet periods.

Where do small worlds come from?

Interfirm networks often take on characteristics consistent with the notion of a small world--they are locally clustered into dense sub-networks or cliques that are sparsely connected by a small number of ties that cut across the cliques, linking network members through a relatively small number of intermediaries. Are these characteristics an emergent property of interfirm networks that result from chance connections among firms, or more strategic partnering by firms to improve or protect their network positions? After outlining a behavioral account for this frequently observed network topology, we show that the evolving investment bank syndicate network in Canada exhibited small world properties from 1952 to 1990. We then identify the investment bank cliques comprising the network and the 'spanning' ties that cut across them, and test three distinct scenarios that may explain the formation of these ties, which are responsible for the small worldliness of the networkc (i) chance partnering of firms in different cliquess (ii) insurgent partnering by peripheral firms to destabilize the network and improve their network positionss and (iii) control partnering by core firms to maintain the network status quo and their positions within it. All three scenarios played a role in explaining the formation of clique-spanning tiess however, chance and insurgent partnering played a greater role in our empirical setting. Our analysis of how small world structures emerge and evolve over time offers new insight into the origins of a prevalent interfirm network topology, and a baseline for constructing future models of interfirm network evolution and dynamics. Copyright 2003, Oxford University Press.

Competition and Coalition among Underwriters: The Decision to Join a Syndicate

This paper studies the decision of lead investment banks to organize hybrid syndicates (commercial banks participating as co-managers) versus pure investment bank syndicates. The findings show that hybrid underwriting issues are more challenging to float. Compared to pure investment bank syndicates, hybrid syndicates serve clients that are smaller, have lower common stock rankings and less prior access to the capital markets, rely more on bank loans, and invest less capital but issue larger amounts, which indicates that commercial banks' participation enhances hybrid services. Moreover, lead investment banks tend to invite banks' participation when clients exhibit higher loyalty in reusing their services.

The Athens Ringroad

On March 6, 2000, the finance documents and project contracts for the Athens Ringroad were signed after almost three years of complex negotiations among the Greek State, the concession company, a bank syndicate, and the European Investment Bank. Among the hurdles were the need to separate financing for different road sections, to develop a mechanism of releasing bank guarantees, and to structure risk-allocation and inter-creditor relationships among the project participants. There was little precedent for such a project financing in Greece despite recent, significant state-sponsored infrastructure development.

Sovereign debt and the London Club: A precommitment device for limiting punishment for default

In this paper, we examine the role that institutions may play in enabling banks to write contracts whereby sovereign debt is not forgiven ex post. Our model provides a rationale for the emergence of a centralized forum for debt renegotiation, such as the London Club, as well as for bank syndicates. These bank syndicates arise as part of a pre-commitment device rather than for risk sharing purposes. We propose a debt contract under which only involuntary default is forgiven ex post. Our main findings are that under this contract, debt forgiveness after voluntary (strategic) default is avoided. When voluntary default occurs, access to the credit market is denied only for a limited number of periods, rather than forever. In contrast to a voluntary default, involuntary default is forgiven immediately.

Sovereignty, Separation and Risk Premiums

AbstractThis study investigates the risk premia of Canadian debt issuers in the U.S. capital markets under conditions of sovereignty stress. In particular, the impact of separatist activity is considered. The incidence of separation news around the sale of debt issues is associated with a specific increase in the proceeds yield or cost to the issuer, but not the market yield. Debt issues by Quebec parties within the separation news event window had an added cost. The added cost is estimated at more than 0.56% to the issuer or about $1.30 million per average $230.77 million issue. These costs are additional fees that are paid to the investment banking syndicate, but these do not increase the yield to the investors. Brown, Durbin and Evans (BDE) recursive residuals tests support the hypothesis of structural changes over time in the pricing process. Debt issues from other countries facing political risk may be priced in a similar manner.

Debt relief and debt rescheduling: The optimal-contract approach

In this paper we study the implications of assuming that bank syndicates and debtor countries entered into implicit debt contracts during the 1970s. Our approach rests on the assumption that loan contracts charged a risk premium because banks entertained the possibility of borrowers' default. Contrary to the previous literature on sovereign debt and debt-overhang, we assume full coordination between banks and debtors in designing optimal debt contracts. In this respect, we find that debt relief may actually be consistent with full-precommitment situations. We present an application of the model to data from Argentina, Brazil, and Mexico.

Abstract: The Investment Banking Contract for New Issues Under Asymmetric Information: Delegation and the Incentive Problem

In placing a new security issue, an investment banker has an opportunity to obtain private information by conducting preselling activities during the registration period. The task of the issuer is to design a contract that both induces the banker to use this information to the issuer's advantage and provides a disincentive for the banker to price the issue too low in order to reduce the effort required to sell the issue. This paper characterizes the class of price response functions that the issuer can induce the banker to choose under a delegation scheme and demonstrates that delegating the pricing decision to the banker can be optimal. MOST NEW SECURITY ISSUES are managed and distributed by investment banking syndicates that perform three basic services for the issuer of the securities. First, investment bankers provide advice and counsel regarding the type of securities to be issued, coupon rates, maturity, timing, offer price, etc. Second, the banking syndicate serves an underwriting function by bearing some or all of the risk associated with the proceeds of the issue. Third, the syndicate performs a distribution function by selling the securities to investors. The underwriting or risk-sharing function has been analyzed by Mandelker and Raviv [12] who determined conditions under which firm commitment, best efforts, and standby arrangements are optimal under the assumption that the issuer and the banker have symmetric information regarding the proceeds from a new issue. Also using the assumption of symmetric information, Baron [1] investigated the pricing and distribution of new issues and the incentive problem resulting from the inability of the issuer to observe the effort expended by the banker in distributing the securities. To mitigate the incentive problem in that case, the issuer must sacrifice some gains from optimal risk sharing in order to induce the banker, through the design of the commission payment, to expend more effort in selling the issue than the banker would otherwise expend. When the issuer and the banker have symmetric information regarding the demand for the issue, the issuer has no reason to seek advice from the investment banker. A principal reason for utilizing the services of an investment banker, however, is that the banker may have better information than does the issuer

The Theory of Syndicates

WE SHALL DEFINE a syndicate to be a of individual decision makers who must make a common decision under uncertainty, and who, as a result, will receive jointly a payoff to be shared among them. Our concern is to analyze the decision process of a syndicate when the members have diverse risk tolerances and/or diverse probability assessments of the uncertain events affecting the payoff. Of particular interest is the possiblity of constructing a surrogate group utility and a surrogate group probability assessment. Such constructions potentially have a role in the theory of finance; e.g., for determining the forms of organizational charters and financial instruments, as well as the modes of delegating the decision process to professional managers. The present treatment, however, is confined to tractable features embodying only a small measure of the complexity of practical situations. Of comparable importance are the ramifications for welfare theory; in particular, we shall be able to specify conditions under which Pareto optimal behavior by the satisfies the Savage axioms [15] foy consistent decision making under uncertainty, and to isolate the inconsistent characteristics in the contrary case. Arrow's original treatise [1] has been the source of most of the work on decision theory. Marschak [13], Radner [17], and Bower [6] have considered the case of a team, in which there is a joint utility function for the members. Harsanyi [9] and Theil [16] have considered the criterion that the decisions satisfy the Von Neumann-Morgenstern axioms, and others. Madansky [12] has imposed the external Bayes axiom in the case of a common utility function but differing probability assessments among the members. Christenson [7] has constructed an axiomatic system for the case of an investment banking syndicate that is a special case of the present study, except for certain institutional factors. Borch [3, 4, 5]

Public Administration of Salt in China: A Historical Survey

While some occasional notices by Western students appeared in the late nineteenth century in regard to a field hitherto largely unknown to Europeans it was not until the advent of the socalled era of financial control in China that more intensive examinations by Western financial experts were made, aided by Chinese economists and industrial leaders. These investigations began to bear fruit with the assignment of foreign officers of the Imperial Maritime Customs to the service of the Anglo-German loan of 1898, for which China was obliged to pledge revenues from salt in six collectorates in the Yangtze River Valley. The character of the salt administration became still more evident during the negotiation of the Hukuang Railway loans for the construction with foreign capital of railways in Central China, and with the formation of the Six Power Banking Syndicate in 1912. Unlike the earlier scholarly researches of such Sinologists as Hirth and Parker, inquiries into the gabelle in China were now made by European and Japanese experts for the very practical purposes of determining the burden which the salt revenue might be expected to carry for the service and the amortization of financial advances to the Chinese Government by foreign bankers against the flotation of bonds on the world's bourses. But even here the conclusions reached were of the most approximate nature, based as they were upon the very incomplete and often misleading records of the Chinese treasury. Estimates as to the annual gross collections varied from forty-eight to sixty-four millions of taels 1 of silver. Only the net amount remitted to the Central Government was agreed upon by various authorities as in the neighborhood of thirteen million taels. This enormous discrepancy between gross and net collection could be accounted for only by the method of allocation of the revenue. For some time prior to 1909, the salt revenue administration had come to be conducted by the provinces. The Imperial Government merely laid down the lines upon which rates of duty were to be levied and the general procedure of control of manufacture and transportation of salt. The governor or viceroy of a province, through the provincial salt commissioner, supervised the salt impost in his jurisdiction, referring only special administrative questions to the central authorities for approval. From revenues thus collected, the