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Title: Conflict of Interest in Universal Banking: Bank Lending, Stock Underwriting, and Fund Management

Author(s): Hedva Ber, Yishay Yafeh and Oved Yosha

Publication Date: January 2000

Keyword(s): Bank Underwriting And Fund Management, Conflict Of Interest, Initial Public Offerings and Universal Banking

Programme Area(s): Financial Economics

Abstract: Using a newly-constructed data set on Israeli Initial Public Offering (IPO) firms in the 1990s, we study costs and benefits of universal banking. We find that a firm whose equity was underwritten by a bank-affiliated underwriter, when the same bank was also a large creditor of the firm in the IPO year, exhibits significantly better than average post-issue accounting performance, but that its stock performance during the first year following the IPO is considerably lower than average. When an investment fund managed by the same bank is heavily involved in the IPO as buyer of the newly-issued equity, the stock performance during the first year following the IPO is even lower. This, together with negative first day returns, is indicative of IPO overpricing. We interpret these findings as evidence that universal banks use their superior information regarding client firms to float the stock of the cherries, not the lemons (as measured by post-issue accounting performance), but that bank managed funds pay too much for bank underwritten IPOs, at the expense of the investors in the funds. These results suggest that there is conflict of interest in the combination of bank lending, underwriting, {\em and\/} fund management.

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Bibliographic Reference

Ber, H, Yafeh, Y and Yosha, O. 2000. 'Conflict of Interest in Universal Banking: Bank Lending, Stock Underwriting, and Fund Management'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=2359