Ostensibly, the SEC's new round of regulatory activity is motivated by a bout of well-publicized business scandals and an explosive increase in financial innovations and instruments. Many critics of the “new” SEC question the proportionality and usefulness of the responses, which move the SEC well beyond reliance on disclosure and promotion of transparency. Others argue that more heavy-handed and far-reaching regulation is necessary given the vast changes in financial markets, the increasing importance of (largely unregulated) hedge funds and private equity, and corporate scandals that allege fraud and deception. This paper provides a rationale for studying recent regulatory changes and for addressing the overarching question of how to define the boundaries of SEC intervention in financial markets. The study provides an overview of papers in this special issue and concludes with suggestions for how policymakers can use research to better evaluate the costs and benefits of regulation.

We study the role of banking relationships in IPO underwriting. When a firm in Japan goes public, it can engage an investment bank that is related through a common main bank, or can select an alternative investment bank. The main bank relationship can be an efficient way for the investment bank to acquire information generated by the main bank, but may give rise to conflicts of interest. We find that main bank relationships give small issuers increased access to equity capital markets, but that issuers of large IPOs often switch to non-related investment banks that are capable of managing large offerings. While investment banks seek to exploit bargaining power with related issuers, issuers respond to expected high issue cost by switching to non-related investment banks. The net result is that total issue costs through related and non-related investment banks are similar. With respect to aftermarket performance and use of proceeds, we find no evidence of conflict of interest or self-dealing for either the main bank or the investment bank.