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You scratch my back and i scratch yours: evidence from relationship-based bidding in IPO auctions

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  • Wenjun Wang

    (Agricultural Bank of China)

Abstract

Using a dataset of institutional bids for IPOs, we study how relationships with lead underwriters impact institutional investors’ bidding strategy in the auctioned IPOs. Our paper finds that strong business ties lead to higher bid prices. The effect is more pronounced among IPO firms that receive less market attention, and is attenuated for IPOs certified by reputable intermediaries. We propose that rent-seeking incentives may be the potential mechanism for this relationship-based bidding. Our study highlights that the business connection between underwriters and institutional investors has effect on the IPO pricing.

Suggested Citation

  • 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.
    • Handle: RePEc:kap:rqfnac:v:62:y:2024:i:4:d:10.1007_s11156-024-01245-9
    DOI: 10.1007/s11156-024-01245-9
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    More about this item

    Keywords

    Business ties; IPO pricing; Bidding strategy; Mutual funds;
    All these keywords.

    JEL classification:

    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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