The Effect of ‘Underwriter–Issuer’ Personal Connections on IPO Underpricing

59 Pages Posted: 28 Jun 2018

See all articles by Hossein Khatami

Hossein Khatami

University of Manchester - Manchester Business School

Maria‐Teresa Marchica

University of Manchester - Alliance Manchester Business School

Roberto Mura

University of Manchester - Manchester Business School

Date Written: June 15, 2018

Abstract

Using a large sample of initial public offerings in the U.S. we show that personal connections between directors and top executives of issuers and underwriting banks result in significantly lower levels of IPO underpricing. We estimate the average effect to be about 12 percentage points. The results hold with several alternative robustness tests including additional controls for managerial traits, matching exercises and doubly robust estimation. We use a very wide set of criteria to split subsamples of firms that are expected to be more/less exposed to asymmetric information problems. Our results indicate that the effect of connections is significantly stronger for companies that suffer more from asymmetric information problems. This corroborates the idea that the lower level of underpricing for connected companies reflects better flow of information with the underwriter.

Keywords: IPO, Underpricing, Asymmetric Information, Executive and Director Networks

Suggested Citation

Khatami, Seyed Hossein and Marchica, Maria‐Teresa and Mura, Roberto, The Effect of ‘Underwriter–Issuer’ Personal Connections on IPO Underpricing (June 15, 2018). Available at SSRN: https://ssrn.com/abstract=3197066 or http://dx.doi.org/10.2139/ssrn.3197066

Seyed Hossein Khatami

University of Manchester - Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom
+44791262959 (Phone)

Maria‐Teresa Marchica

University of Manchester - Alliance Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

Roberto Mura (Contact Author)

University of Manchester - Manchester Business School ( email )

Crawford House
Oxford Road
Manchester, Lancashire M13 9PL
United Kingdom
+44 (0) 161 275 4023 (Fax)

HOME PAGE: http://www.robertomura.com

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