J.L. Kellogg Graduate School of Management, Northwestern University, Evanston, Illinois, U.S.A. The first author's contribution has been supported by the National Science Foundation, Grant No. SOC 77–07251. The authors would like to thank Sudipto Bhattacharya, Hans Stoll, Tracy Lewis, Joseph Swanson, Richard Kihlstrom, and a referee for their helpful comments.
The Investment Banking Contract For New Issues Under Asymmetric Information: Delegation And The Incentive Problem
Article first published online: 30 APR 2012
1980 The American Finance Association
The Journal of Finance
Volume 35, Issue 5, pages 1115–1138, December 1980
How to Cite
BARON, D. P. and HOLMSTRÖM, B. (1980), The Investment Banking Contract For New Issues Under Asymmetric Information: Delegation And The Incentive Problem. The Journal of Finance, 35: 1115–1138. doi: 10.1111/j.1540-6261.1980.tb02199.x
- Issue published online: 30 APR 2012
- Article first published online: 30 APR 2012
In placing a new security issue, an investment banker has an opportunity to obtain private information by conducting preselling activities during the registration period. The task of the issuer is to design a contract that both induces the banker to use this information to the issuer's advantage and provides a disincentive for the banker to price the issue too low in order to reduce the effort required to sell the issue. This paper characterizes the class of price response functions that the issuer can induce the banker to choose under a delegation scheme and demonstrates that delegating the pricing decision to the banker can be optimal.