Underwriter Compensation and Corporate Monitoring

Authors

  • ROBERT S. HANSEN,

  • PAUL TORREGROSA

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    • Hansen is from the R. B. Pamplin College of Business, Virginia Tech, Blacksburg, Virginia, and Torregrosa is from the College of Business, Marquette University, Milwaukee, Wisconsin. We thank Sanjai Bhagat, Dave Denis, Jay Ritter, and John Thatcher for helpful discussion and comments, and Atulya Sarin for able computing assistance. We also thank the referee and the editor René Stulz. Hansen acknowledges the R. B. Pamplin College of Business for partial financial support for this research and Torregrosa acknowledges the Marquette College of Business for partial financial support for this research.

ABSTRACT

Studies suggest that underwriting syndicates provide marketing services and certify the fairness of offer prices. We argue that syndicate lead banks also monitor manager effort, increasing the value of capital-raising companies. A given level of monitoring is associated with a given level of intrinsic value, so there is a “schedule” of certifiable offer prices, depending on the level of monitoring. Monitoring, marketing, and certification are, therefore, all legitimate syndicate functions. New evidence supporting the conclusion that syndicates provide corporate monitoring is presented.

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