Conflict of interest and certification in the U.S. IPO market

We examine the long-run performance and valuation of IPOs underwritten by relationship banks. We find that over one- to three-year horizons these IPOs do not underperform similar stocks managed by independent institutions. Moreover, our analysis suggests that relationship banks avoid potential conflicts of interest by choosing to underwrite their best clients' IPOs. Consistent with this result, we show that investors value new issues managed by relationship banks higher than similar IPOs managed by outside banks. Our findings support the certification role of relationship banks and suggest that the effect of the 1999 repeal of Sections 20 and 32 of the Glass-Steagall Act has not been negative.