418 A. Ljungqvist
this debate on both sides belies the fact that the truth is probably somewhere in be-
tween. For the information-acquisition mechanism of Benveniste and Spindt to work,
underwriters need to be given discretion over the way they price and allocate IPO shares.
Allocation discretion, in turn, may well aggravate an agency problem between the is-
suer and its banker arising from the fact that bankers deal repeatedly with institutional
investors but infrequently with issuers.
Arising from this debate, there is continued interest in at least four areas:
(a) behavioral approaches to explain why the extent of underpricing varies so much
over time;
(b) tests exploiting cross-country differences in institutional frameworks;
(c) work shedding light on the allegedly conflicted behavior of investment banks during
the market boom of the late 1990s; and
(d) the potential for using auction mechanisms to price and allocate IPOs.
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