Article by Royce de R. Barondes
Numerous scholarly analyses of capital markets regulation conceptualize assorted professionals, e.g., lawyers, accountants, and investment banks, as “gatekeepers.” Although some gatekeeping is explicit, e.g., the audit requirement for public companies, other gatekeeping is implicit. Lawyers and investment banks act as gatekeepers in deciding whether to link their professional reputations to prospective clients.
Much legal scholarship investigating gatekeeping is qualitative, presenting merely indeterminate analyses. This Article informs the debate by presenting empirical evidence of the efficacy of one kind of gatekeeper, a “qualified independent underwriter.”
National Association of Securities Dealers, Inc. (NASD) rules provide that when an investment bank participating in a securities offering has one of several enumerated conflicts of interest, the securities cannot be sold at a price higher than that recommended by a qualified independent underwriter. Examining prices of 1188 initial public offerings (IPOs) from 1997 through 2000, regression results disclose IPO purchasers have relatively worse initial returns, estimated at fifteen percentage points lower, where participating investment banks are receiving more than 10% of the IPO proceeds. There also is a relatively worse initial return, estimated at twenty-seven percentage points lower, where participating investment banks own at least 10% of the issuer's preferred stock or subordinated debt. Qualitatively similar results are obtained by estimating the “average effect of the treatment on the treated” through propensity score matching.
The results indicate proposals to subject all IPO pricing to approval by independent broker-dealers—on which the NASD solicited comments—would likely be ineffectual. The results also provide guidance in assessing the extent to which reputational capital provides adequate incentives for investment banks to act as gatekeepers.
About the Author
Royce de R. Barondes. Senior Fellow, Contracting and Organizations Research Institute; Professor, University of Missouri-Columbia School of Law.
Citation
79 Tul. L. Rev. 859 (2005)