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How do Financial Intermediaries Create Value in Security Issues?

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journal contribution
posted on 2016-06-01, 13:30 authored by Fabrizio Adriani, Luca G. Deidda, Silvia Sonderegger
We study incentive provision in a model of securities issuance with an informed issuer and uninformed investors. We show that the presence of an informed intermediary may increase surplus even if we allow for collusion between the intermediary and the issuer. Collusion is neutralized by introducing a misalignment between the interests of the issuer and those of the intermediary. To achieve this, the intermediary commits to hold some of the securities. The intermediary then underprices the remaining securities and extracts any investor surplus through a “participation fee.” We provide an explanation for the diffusion of book building and quid pro quo practices in Initial Public Offerings (IPOs).

History

Citation

Review of Finance, 2014, 18 (5), pp. 1915-1951

Author affiliation

/Organisation/COLLEGE OF SOCIAL SCIENCES, ARTS AND HUMANITIES/Department of Economics

Version

  • AM (Accepted Manuscript)

Published in

Review of Finance

Publisher

Oxford University Press (OUP) for European Finance Association

issn

1572-3097

eissn

1573-692X

Copyright date

2014

Available date

2016-06-01

Publisher version

http://rof.oxfordjournals.org/content/18/5/1915

Language

en