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A Model of the Demand for Investment Banking Advising and Distribution Services for New Issues
Author(s) -
BARON DAVID P.
Publication year - 1982
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/j.1540-6261.1982.tb03591.x
Subject(s) - issuer , adverse selection , moral hazard , investment (military) , investment banking , information asymmetry , order (exchange) , distribution (mathematics) , business , supply and demand , finance , actuarial science , economics , microeconomics , incentive , politics , mathematics , political science , mathematical analysis , law
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.