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A Theory of the Syndicate: Form Follows Function
Author(s) -
Pichler Pegaret,
Wilhelm William
Publication year - 2001
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/0022-1082.00404
Subject(s) - syndicate , pareto principle , moral hazard , incentive , production (economics) , function (biology) , business , investment (military) , microeconomics , investment banking , economics , actuarial science , industrial organization , finance , operations management , law , political science , evolutionary biology , politics , biology
We relate the organizational form of investment banking syndicates to moral hazard in team production. Although syndicates are dissolved upon deal completion, membership stability across deals represents a barrier to entry that enables the capture of quasirents. This improves incentives for individual bankers to cultivate investor relationships that translate into greater expected proceeds. Reputational concerns of lead bankers amplify the effect. We derive conditions under which restricted entry and designation of a lead banker strictly Pareto dominate, in which case it is also strictly Pareto dominant for the syndicate's fee to be greater than members' cost of participation.