Journal of Economics and Finance

, Volume 28, Issue 1, pp 68–87 | Cite as

Valuation uncertainty and IPOs: Investment bank versus commercial bank underwriters

  • Gregory M. Hebb
  • Gregory H. MacKinnon


This paper tests commercial bank underwriting for the existence of a conflict of interest versus a certification role. Our tests compare samples of equity IPOs underwritten by both commercial and investment banks. We examine the degree of asymmetric information present in the market for these issues by examining their microstructure trading characteristics. Our results show that greater information asymmetry is present in the after-market when a commercial bank acts as underwriter. The asymmetry resolves itself as the market learns more about each issue, deciding which ones may have involved a conflict. This is consistent with greater uncertainty about the value of commercial-bank-underwritten IPOs, and is also consistent with the market perceiving a possible conflict of interest on the part of commercial banks.


Asymmetric Information Commercial Bank Initial Public Offering Market Maker Price Impact 


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. Aggarwal, R. 2000. “Stabilization Activities by Underwriters after Initial Public Offerings.”Journal of Finance 55: 1075–1103.CrossRefGoogle Scholar
  2. Allen, F., and G. R. Faulhaber. 1989. “Signaling by Underpricing in the IPO Market.”Journal of Financial Economics 23: 303–323.CrossRefGoogle Scholar
  3. Ang, J., and T. Richardson. 1994. “The Underwriting Experience of Commercial Bank Affiliates Prior to the Glass-Steagall Act: A Re-examination of Evidence for Passage of the Act.”Journal of Banking and Finance 18: 351–395.CrossRefGoogle Scholar
  4. Bagehot, W. (pseudonym). 1971. “The Only Game in Town.”Financial Analysts Journal 27: 31–53.CrossRefGoogle Scholar
  5. Benston, G. 1996.The Origins and Justification for the Glass-Steagall Act. New York University.Google Scholar
  6. Carter, R., F. Dark, and A. Singh. 1998. “Underwriter Reputation, Initial Returns, and the Long-Run Performance of IPO Stocks.”Journal of Finance 53: 285–313.CrossRefGoogle Scholar
  7. Carter, R., and S. Manaster. 1990. “Initial Public Offerings and Underwriter Reputation.”Journal of Finance 45: 1045–1068.CrossRefGoogle Scholar
  8. Copeland, W.G., and D. Galai. 1983. “Information Effects of the Bid-Ask Spread.”Journal of Finance 38: 1457–1469.CrossRefGoogle Scholar
  9. Ellis, K., R. Michaely, and M. O'Hara. 2000. “When the Underwriter is the Market Maker: An Examination of Trading in the IPO Aftermarket.”Journal of Finance 55: 1039–1074.CrossRefGoogle Scholar
  10. Fama, E. 1985. “What's Different about Banks?.”Journal of Monetary Economic 15: 29–39.CrossRefGoogle Scholar
  11. Gande, A., M. Puri, A. Saunders, and I. Walter. 1997. “Bank Underwriting of Debt Securities: Modern Evidence.”Review of Financial Studies 10: 1175–1202.CrossRefGoogle Scholar
  12. Glosten, L., and P. Milgrom. 1985. “Bid, Ask and Transaction Prices in a Specialist Market with Heterogeneously Informed Traders.”Journal of Financial Economics 14: 71–100.CrossRefGoogle Scholar
  13. Gompers, P., and J. Lerner. 1999. “Conflict of Interest and Reputation in the Issuance of Public Securities: Evidence from Venture Capital.”Journal of Law and Economics 42: 1–29.CrossRefGoogle Scholar
  14. Hasbrouck, J. 1991. “Measuring the Information Content of Stock Trades.”Journal of Finance 46: 179–207.CrossRefGoogle Scholar
  15. Hebb, G. 2002. “Commercial Bank Involvement in Equity Underwritings.”Financial Review 37:185–205.CrossRefGoogle Scholar
  16. Hegde, S., and R. Miller. 1989. “Market-Making in Initial Public Offerings of Common Stocks: An Empirical Analysis.”Journal of Financial and Quantitative Analysis 24: 75–90.CrossRefGoogle Scholar
  17. Huang, R., and H. Stoll. 1997. “The Components of the Bid-Ask Spread: A General Approach.”Review of Financial Studies 10: 995–1034.CrossRefGoogle Scholar
  18. James, C. 1987. “Some Evidence on the Uniqueness of Bank Loans.”Journal of Financial Economics 19: 217–235.CrossRefGoogle Scholar
  19. Jones, C.M., and M.L. Lipson. 1999. “Price Impacts and Quote Adjustment on the Nasdaq and NYSE/AMEX. Working paper. Columbia University.Google Scholar
  20. Kroszner, R., and R. Rajan. 1994. “Is the Glass-Steagall Act Justified?” A study of the U.S. Experience with Universal Banking before 1993.”American Economic Review 84: 810–832.Google Scholar
  21. Kyle, A. 1985. “Continuous Auctions and Insider Trading.”Econometrica 53: 1315–1335.CrossRefGoogle Scholar
  22. Madhavan, A., M. Richardson, and M. Roomans. 1997. “Why Do Security Prices Change? A Transaction-Level Analysis of NYSE Stocks.”Review of Financial Studies 10: 1035–1064..CrossRefGoogle Scholar
  23. Megginson, W.L., and K.A. Weiss. 1991. “Venture Capitalist Certification in Initial Public Offerings.”Journal of Finance 46: 879–904.CrossRefGoogle Scholar
  24. Puri, M. 1994. “The Long-Term Default Performance of Bank Underwritten Security Issues.”Journal of Banking and Finance 18: 397–418.CrossRefGoogle Scholar
  25. Puri, M. 1996. “Commercial Banks in Investment Banking: Conflict of Interest or Certification Role?”Journal of Financial Economics 40: 373–401.CrossRefGoogle Scholar
  26. Ritter, J., and I. Welch. 2002. “A Review of IPO Activity, Pricing and Allocations.”Journal of Finance 57: 1795–1828.CrossRefGoogle Scholar
  27. Rock, K. 1986. “Why New Issues Are Underpriced.”Journal of Financial Economics 15: 187–212.CrossRefGoogle Scholar
  28. Ross, K., J. Shapiro, and K. Smith. 1996. “Price Improvement of Super Dot Market Orders on the NYSE.” NYSE working paper #96-02.Google Scholar
  29. Saunders, A. 1985. “Conflict of Interest: An Economic View.” InDeregulating Wall St.: Commercial Bank Penetration of the Corporate Securities Market, edited by I. Walter. New York: John Wiley and Sons.Google Scholar
  30. Saunders, A., and I. Walter. 1994.Universal Banking in the United States. Oxford University Press.Google Scholar

Copyright information

© Academy of Economics and Finance 2004

Authors and Affiliations

  • Gregory M. Hebb
    • 1
  • Gregory H. MacKinnon
    • 2
  1. 1.Dalhousie UniversityHalifax
  2. 2.Department of Finance and Management ScienceSaint Mary’s UniversityHalifaxCanada

Personalised recommendations