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

51 Pages Posted: 28 Jun 2018 Last revised: 17 Jun 2021

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 - Alliance Manchester Business School

Date Written: June 15, 2021

Abstract

Using a sample of U.S. initial public offerings (IPOs), we show that personal connections between directors and top executives of issuers and those of 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 non-random choice of underwriter, additional controls for managerial traits, matching exercises and doubly robust estimation. Our results indicate that the effect of connections is significantly stronger for companies that are more likely to suffer 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, executive and director networks, asymmetric information

Suggested Citation

Khatami, Seyed Hossein and Marchica, Maria‐Teresa and Mura, Roberto, The Effect of ‘Underwriter–Issuer’ Personal Connections on IPO Underpricing (June 15, 2021). 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 - Alliance Manchester Business School ( email )

Booth Street West
Manchester, Lancashire M15 6PB
United Kingdom

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

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