Do Underwriters Compete in IPO Pricing?

Management Science 64 (2), 925-954

63 Pages Posted: 10 Oct 2016 Last revised: 19 Apr 2018

See all articles by Evgeny Lyandres

Evgeny Lyandres

Boston University

Fangjian Fu

Singapore Management University - Lee Kong Chian School of Business

Erica X. N. Li

Cheung Kong Graduate School of Business

Date Written: 2016

Abstract

We propose and implement a direct test of the hypothesis of oligopolistic competition in the U.S. underwriting market against the alternative of implicit collusion among underwriters. We construct a simple model of interaction between heterogenous underwriters and heterogenous firms and solve it under two alternative assumptions: oligopolistic competition among underwriters and implicit collusion among them. The two solutions lead to different equilibrium relations between the compensation of underwriters of different quality on one hand and the time-varying demand for public incorporation on the other hand. Our empirical results, obtained using 39 years of IPO data, are generally consistent with the implicit collusion hypothesis – banks, especially larger ones, seem to internalize the effects of their underwriting fees and IPO pricing on their rivals.

Keywords: IPOs, Underwriters, Competition, Collusion

Suggested Citation

Lyandres, Evgeny and Fu, Fangjian and Li, Erica X. N., Do Underwriters Compete in IPO Pricing? (2016). Management Science 64 (2), 925-954, Available at SSRN: https://ssrn.com/abstract=2499554

Evgeny Lyandres (Contact Author)

Boston University ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States
617-3582279 (Phone)

Fangjian Fu

Singapore Management University - Lee Kong Chian School of Business ( email )

50 Stamford Road
Singapore, 178899
Singapore

Erica X. N. Li

Cheung Kong Graduate School of Business ( email )

Oriental Plaza, Tower E3
One East Chang An Avenue
Beijing, 100738
China

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