How do Financial Intermediaries Create Value in Security Issues?

Adriani, Fabrizio; Deidda, Luca; Sonderegger, Silvia

Abstract

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).

• Journal Article Type: Article
• Acceptance Date: Aug 1, 2013
• Online Publication Date: Sep 11, 2013
• Publication Date: Aug 1, 2014
• Deposit Date: Jul 14, 2016
• Publicly Available Date: Jul 14, 2016
• Journal: Review of Finance
• Print ISSN: 1572-3097
• Electronic ISSN: 1573-692X
• Publisher: Oxford University Press
• Peer Reviewed: Peer Reviewed
• Volume: 18
• Issue: 5
• Pages: 1915-1951
• DOI: https://doi.org/10.1093/rof/rft027
• Public URL: https://nottingham-repository.worktribe.com/output/997838
• Publisher URL: http://rof.oxfordjournals.org/content/18/5/1915
• Additional Information: This is a pre-copyedited, author-produced PDF of an article accepted for publication in Review of Finance following peer review. The version of record Fabrizio Adriani, Luca G. Deidda, and Silvia Sonderegger; How do Financial Intermediaries Create Value in Security Issues? Review of Finance 2014 18: 1915-1951 is available online at: http://rof.oxfordjournals.org/content/18/5/1915