The Role of Individual Investment Bankers in IPO Pricing: Evidence from Investor Bidding Behavior

Abstract

Using unique datasets on investor bidding and on investment bankers’ biography, we examine the role of individual investment bankers in the process of IPO pricing. We find that when an investment banker has a social connection with a mutual fund manager, this manager is significantly more likely to (1) participate in the IPO, (2) submit above average bid prices, and (3) realize lower IPO returns. The effect of investment bankers’ social relationships is more pronounced when the issuer has low accounting quality and/or when the underwriter is a small bank. Further evidence shows that social relationships between investment bankers and fund managers reduce IPO underpricing. Overall, our findings suggest that social interactions help individual investment bankers to efficiently exchange value-relevant information with IPO investors.

Keywords: Initial public offering; Investment banker; Social relationships; Information asymmetry

JEL Classification: G24, G30, G41, G14