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Prevention Is Better than Cure: The Role of IPO Syndicates in Precluding Information Acquisition


Barzel, Yoram; Johnsen, D Bruce; Habib, Michel (2006). Prevention Is Better than Cure: The Role of IPO Syndicates in Precluding Information Acquisition. Journal of Business, 79(6):2911-2923.

Abstract

We treat information acquisition by potential investors in initial public offerings as endogenous. With endogenous information, the critical question is why underwriters would allow investors to spend resources acquiring superior information intended solely to effect a wealth transfer. We show that an investment banking syndicate is an institutional arrangement designed to avoid such a transfer. By inviting rival banks to share in the offering, a managing underwriter ensures they have a strong incentive to remain ignorant. We characterize the resulting outcome as one of symmetric ignorance. The desire to maintain symmetric ignorance is consistent with the observed passivity of nonmanaging syndicate participants.

Abstract

We treat information acquisition by potential investors in initial public offerings as endogenous. With endogenous information, the critical question is why underwriters would allow investors to spend resources acquiring superior information intended solely to effect a wealth transfer. We show that an investment banking syndicate is an institutional arrangement designed to avoid such a transfer. By inviting rival banks to share in the offering, a managing underwriter ensures they have a strong incentive to remain ignorant. We characterize the resulting outcome as one of symmetric ignorance. The desire to maintain symmetric ignorance is consistent with the observed passivity of nonmanaging syndicate participants.

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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Date:2006
Deposited On:22 Jun 2012 22:41
Last Modified:21 Nov 2017 16:05
Publisher:University of Chicago Press
ISSN:0021-9398
Publisher DOI:https://doi.org/10.1086/508003
Official URL:http://www.jstor.org/stable/10.1086/508003
Other Identification Number:merlin-id:3553

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