Conflict of Interest in the Issuance of Public Securities: Evidence from Venture Capital / Paul Gompers, Josh Lerner.

Format:

Book

Author/Creator:

Gompers, Paul.

Contributor:

National Bureau of Economic Research.

Lerner, Josh.

Series:

Working Paper Series (National Bureau of Economic Research) no. w6847.

NBER working paper series no. w6847

Language:

English

Subjects (All):

Investment banking.

Venture capital.

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Conflict of Interest in the Issuance of Public Securities

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1998.

Cambridge, Massachusetts : National Bureau of Economic Research, 1998.

Summary:

In this paper we investigate potential conflicts of interest in the issuance of public securities in a setting analogous to a universal bank, i.e., the underwriting of initial public offerings by investment banks that hold equity in a firm through a venture capital subsidiary. We contrast two hypotheses. Under anticipate the conflict. The suggests that investment banks are able to utilize superior information when they underwrite securities. The evidence supports the rational discounting hypothesis. Initial public offerings that are underwritten by affiliated investment banks perform as well or better than issues of firms in which none of the investment banks held a prior equity position. Investors do, however, require a greater discount at the offering to compensate for potential adverse selection. We also provide evidence that investment bank-affiliated venture firms address the potential conflict by investing in and subsequently underwriting less information-sensitive issues. Our evidence provides no support for the prohibitions on universal banking instituted by the Glass-Steagall Act of 1933.

Notes:

Print version record

December 1998.