A Theory of the Syndicate: Form Follows Function
Pegaret Pichler, William Wilhelm
Abstract
We relate the organizational form of investment banking
syndicates to moral hazard in team production. Although syndicates are
dissolved upon deal completion, membership stability across deals represents
a barrier to entry that enables the capture of quasi-rents. This improves
incentives for individual bankers to cultivate investor relationships that
translate into greater expected proceeds. Reputational concerns of lead
bankers amplify the effect. We derive conditions under which restricted
entry and designation of a lead banker strictly Pareto dominate, in which
case it is also strictly Pareto dominant for the syndicate's fee to be
greater than members' cost of participation.
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