A Model of the Demand for Investment Banking Advising and Distribution Services for New Issues



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    • Stanford University. This research has been supported by the National Science Foundation, Grant No. SOC 77–07251 A01. The author would like to thank Victor Liu for his assistance and Stuart Greenbaum, Bengt Holmstrom, and the participants in the Finance Workshop at Northwestern University and the Economics of Uncertainty Workshop at the University of Chicago for their helpful comments.


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.