Affiliation ties and underwriter selection

This paper examines the determinant of an initial public offering (IPO) underwriting mandate in Japan. As a determinant, I focus on affiliation ties, which are the relationships between issuers’ board members and the underwriters with which these members have worked. Using board members’ biographical information, I find that the presence of board members who have worked at a specific bank or its parent company increases the probability of choosing the bank as the lead underwriter. This effect is economically larger than that of lending relationships and remains even if the issuer has no lending and shareholding relationships with the underwriter. In addition, the effect is more pronounced when firms with small issues choose high-reputation underwriters, suggesting that affiliation ties can help firms with small issues, which would usually not be accepted by reputable underwriters, to be underwritten by reputable underwriters. I find little evidence that affiliation ties affect IPO outcomes, as measured by price revisions and underwriting fees.