214 S. Drucker and M. Puri
the equity and debt markets suggest that conflicts of interest are limited by commercial
banks certification ability.
5.3. Israel
In Israel, banks are highly universal in nature, managing investment funds and con-
trolling underwriting affiliates. The close links between the investment fund and the
bank allow for researchers to examine this potential source of conflicts of interest.Ber,
Yafeh, and Yosha (2001)perform such an analysis, examining if conflicts of interest
are present when banks underwrite Israeli IPOs. In this study, the authors gather data
on 128 IPOs of manufacturing firms from 1991 to 1994. For each of the issues, the
authors identify if the firm has a prior lending relationship with the underwriter and if
the bank’s investment fund purchases the firm’s stock at the time of the offering and
in the aftermarket.Ber, Yafeh, and Yosha (2001)examine the effect of these relation-
ships on the accounting and stock performance for one year following the issue as well
as the underpricing of the issue. In terms of accounting profitability, the authors find
that firms that are underwritten by bank lenders significantly outperform other issuers.
Further, they find that these better performing firms were similar ex ante to other IPO
firms based on publicly available information, indicating that banks underwrite superior
firms. This is inconsistent with the existence of conflicts of interest. However, when the
authors examine the long run stock performance, their results indicate that the stocks of
firms with a bank underwriter-lender exhibit significantly negative excess returns during
the first year that are significantly different than the excess of returns of firms that do
not have a bank lender-underwriter.^22 Also, an examination of first day returns reveals
that issues involving a bank lender-underwriter are significantly overpriced. How can
the strong accounting performance and poor stock performance be reconciled? The au-
thors find that much of the poor stock performance comes from issues where the bank’s
fund management division made significant purchases.Ber, Yafeh, and Yosha (2001)
conclude that the results indicate a conflict of interest, as banks overpriced these IPOs,
favoring the IPO client firms at the expense of investors in the bank’s investment fund.
- The indirect role of commercial banks on capital markets
Throughout this article, we have documented that the empirical literature has gener-
ally found commercial banks to be certifiers of firm value when they combine lending
and underwriting activities. However, even if banks cannot directly participate in cap-
ital markets through underwriting, banks’ actions and lending decisions might still
affect outside stakeholders in firms. Can banks, which have private information about
(^22) The authors use a market model approach and compare the excess returns for each firm for the first year
after IPO.