Quid Pro Quo in IPO Auctions

Abstract

Is there quid pro quo in auctioned IPOs - an alternative to bookbuilding in the U.S. and elsewhere? Using proprietary data on uniform-pricing IPO auctions from China, we show when the share allocation rule shifted from pro rata to lottery draw (that makes quid pro quo valuable to a bidder), fund families having pre-shift stronger brokerage commission ties with the underwriter submit bids later, place more strategic but accurate bids, have more bids qualified for the allocation round, and are more likely to receive share allocation than fund families that have weaker commission ties with the underwriter before the regime change. The evidence supports quid pro quo in IPO auctions facilitated by the underwriter’s leakage of confidential bidding information, which is a questionable practice that not only discourages information production but also gives rise to unfairness.

Keywords: uniform price; auction; quid pro quo; underwriter favoritism

JEL Classification: G24, G28, G32