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- Title
A Model of the Demand for Investment Banking Advising and Distribution Services for New Issues.
- Authors
BARON, DAVID P.
- Abstract
This paper presents a theory of the demand for investment banking advising and distribution services for the case in which the investment banker is better informed about the capital market than is the issuer, and the issuer cannot observe the distribution effort expended by the banker. The optimal contract under which the offer price decision is delegated to the better-informed banker in order to deal with the adverse selection and moral hazard problems resulting from the informational asymmetry and the observability problem is characterized. The model demonstrates a positive demand for investment banking advising and distribution services and provides an explanation of the underpricing of new issues.
- Subjects
INVESTMENT banking; BANKING industry; CAPITAL market; MONEY market; INVESTMENT advisors; FINANCIAL institutions; DISTRIBUTION (Probability theory); FINANCIAL planners; INVESTMENT bankers; ADVERSE selection (Insurance)
- Publication
Journal of Finance (Wiley-Blackwell), 1982, Vol 37, Issue 4, p955
- ISSN
0022-1082
- Publication type
Article
- DOI
10.1111/j.1540-6261.1982.tb03591.x