Underwriter Collusion and IPO Pricing

Abstract

We develop a dynamic model with complete information to study IPO pricing. The model predicts tacit collusion among underwriters and endogenously generates: (1) IPO underpricing; (2) the fluctuation of IPO volume; (3) the time-variation of underpricing in hot and cold markets. In addition, the model helps to explain (1) the severe underpricing during the period of 1999-2000; (2) the highly concentrated structure of IPO underwriting market; (3) the increasing frequency of IPO syndications in recent years. We present evidence of possible collusion among underwriters and provide new empirical evidence on IPO market cycles in support of the model.

Keywords: IPO, Underpricing, Collusion, Underwriter

JEL Classification: G24