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Journal Article

The Investment Banking Contract for New Issues Under Asymmetric Information: Delegation and the Incentive Problem

David P. Baron and Bengt Holmström
The Journal of Finance
Vol. 35, No. 5 (Dec., 1980), pp. 1115-1138
Published by: Wiley for the American Finance Association
DOI: 10.2307/2327089
Stable URL: http://www.jstor.org/stable/2327089
Page Count: 24
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The Investment Banking Contract for New Issues Under Asymmetric Information: Delegation and the Incentive Problem
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Abstract

In placing a new security issue, an investment banker has an opportunity to obtain private information by conducting preselling activities during the registration period. The task of the issuer is to design a contract that both induces the banker to use this information to the issuer's advantage and provides a disincentive for the banker to price the issue too low in order to reduce the effort required to sell the issue. This paper characterizes the class of price response functions that the issuer can induce the banker to choose under a delegation scheme and demonstrates that delegating the pricing decision to the banker can be optimal.

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