Mechanisms for Mitigating Conflicts of Interest Between Underwriters and Issuers in the IPO Process (Zenodo)

Summary

• The relationship between issuing companies and underwriters in an IPO is shaped by agency conflicts where underwriters may intentionally underprice shares or engage in biased allocation.p.1
• Information asymmetry enables underwriters to convince issuers to set artificially low offering prices, resulting in money left on the table.p.2
• Opportunistic allocation practices such as spinning allow underwriters to allocate underpriced shares to favored institutional clients or executives to secure future business.p.2
• Implementing dynamic book-building, Dutch auction mechanisms, and two-part incentive fee structures aligns underwriter compensation with maximizing proceeds for the issuer.p.3
• Engaging Independent Financial Advisors (IFAs) provides issuers with independent evaluation of market demand and underwriter pricing proposals.p.3
• In emerging markets like Uzbekistan, transparent E-IPO algorithmic order allocation and underwriter reputation rankings can eliminate subjective bias and improve market efficiency.p.4

Key insights

1. Underwriters possess superior market demand information compared to issuers, creating information asymmetry that facilitates intentional share underpricing.p.2
2. Spinning distorts fair allocation by channeling high-demand, low-priced shares to institutional funds to foster future underwriter business relationships.p.3
3. Dutch auction models remove subjective underwriter influence by directly systematizing independent investor price bids.p.3
4. Incentive fee contracts offering bonuses or equity warrants for pricing above target ranges directly encourage underwriters to maximize issue proceeds.p.3
5. Independent Financial Advisors audit underwriter valuation reports and book-building integrity to provide objective counsel to corporate supervisory boards.p.3
6. Mandatory conflict-of-interest disclosure aligned with IOSCO standards prevents underwriters from allocating shares to affiliated investment funds.p.3
7. Automated algorithmic allocation on E-IPO platforms removes human bias and favoritism in capital distribution.p.4