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The role of individual investment bankers in IPO pricing: Evidence from investor bidding behavior

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  • Brockman, Paul
  • He, Xianjie
  • Sun, Shuwei
  • Zou, Huan

Abstract

Using unique datasets on investor bidding and on investment bankers' biography, we examine the role of individual investment bankers in the process of IPO pricing. We find that when an investment banker has a social connection with a mutual fund manager, this manager is significantly more likely to (1) participate in the IPO, (2) submit above average bid prices, (3) realize lower IPO returns. The effect of investment bankers' social relationships is more pronounced when the issuer has low accounting quality and/or when the underwriter is a small bank. Further evidence shows that social relationships between investment bankers and fund managers reduce IPO underpricing. Overall, our findings suggest that social interactions help individual investment bankers to efficiently exchange value-relevant information with IPO investors.

Suggested Citation

  • Brockman, Paul & He, Xianjie & Sun, Shuwei & Zou, Huan, 2023. "The role of individual investment bankers in IPO pricing: Evidence from investor bidding behavior," Journal of Corporate Finance, Elsevier, vol. 82(C).
    • Handle: RePEc:eee:corfin:v:82:y:2023:i:c:s0929119923000809
    DOI: 10.1016/j.jcorpfin.2023.102431
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    References listed on IDEAS

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    1. Jay R. Ritter & Ivo Welch, 2002. "A Review of IPO Activity, Pricing, and Allocations," Journal of Finance, American Finance Association, vol. 57(4), pages 1795-1828, August.
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    3. Ball, Ray & Shivakumar, Lakshmanan, 2008. "Earnings quality at initial public offerings," Journal of Accounting and Economics, Elsevier, vol. 45(2-3), pages 324-349, August.
    4. Yao-Min Chiang & Yiming Qian & Ann E. Sherman, 2010. "Endogenous Entry and Partial Adjustment in IPO Auctions: Are Institutional Investors Better Informed?," The Review of Financial Studies, Society for Financial Studies, vol. 23(3), pages 1200-1230, March.
    5. Christopher Armstrong & George Foster & Daniel Taylor, 2016. "Abnormal Accruals in Newly Public Companies: Opportunistic Misreporting or Economic Activity?," Management Science, INFORMS, vol. 62(5), pages 1316-1338, May.
    6. Thomas J. Chemmanur & Gang Hu & Jiekun Huang, 2010. "The Role of Institutional Investors in Initial Public Offerings," The Review of Financial Studies, Society for Financial Studies, vol. 23(12), pages 4496-4540, December.
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    Cited by:

    1. Xuan, Ziyue & Guo, Wenting & Lan, Faqin, 2023. "Underwriters interest binding and IPO underpricing," Finance Research Letters, Elsevier, vol. 57(C).
    2. Wenjun Wang, 2024. "You scratch my back and i scratch yours: evidence from relationship-based bidding in IPO auctions," Review of Quantitative Finance and Accounting, Springer, vol. 62(4), pages 1593-1613, May.
    3. Dong, Xiuliang & Wang, Yiqun & Zhang, Jiaming & Liu, Jianing, 2024. "Sponsor Co-investment, inquiry divergence, and IPO pricing efficiency," Finance Research Letters, Elsevier, vol. 62(PA).

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    More about this item

    Keywords

    Initial public offering; Investment banker; Information asymmetry; Social relationships;
    All these keywords.

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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