Banks, IPO underwriting, and allocation in Japan

•Investigate how IPO issues are underwritten and allocated by different types of underwriters under universal banking in Japan.•Examine the effects of allocations to mutual funds on the initial and aftermarket long-run performance of IPO shares.•Find no efficiency-enhancing role of the information advantage held by the main bank underwriters due to excessive regulatory oversight. We investigate how universal banking groups utilized information advantage at the initial public offerings (IPOs) in Japan over the period 2002-2012. We focus on the IPO issues of universal bank clients allocated by underwriters from the issuers’ main bank groups, competing commercial bank groups, and traditional investment bank groups. We find that the main bank underwriters do not advantage their affiliated mutual funds in terms of the initial and aftermarket returns; neither do the traditional investment bank underwriters. We interpret the former finding as indicating that the information advantage generated by universal banking had not been utilized to increase the benefits of their investment customers. On the other hand, the less informed and thus less monitored commercial bank underwriters allocate IPO issues with low risk-adjusted aftermarket returns to their affiliated mutual funds, suggesting conflicts of interest or an inefficient outcome.