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Roberto Mura, Ph.D.

Manchester Business School, United Kingdom

Authors: Seyed Hossein Khatami, Maria-Teresa Marchica, and Roberto Mura

Abstract: Using a large sample of initial public offerings in the U.S. we show that personal connections between directors and top executives in issuers and underwriting banks result in significantly lower levels of IPO underpricing. We estimate the average effect to be about 12%. The results are robust to several alternative robustness tests including additional controls for managerial traits and different matching exercises. We use a very wide set of criteria to split subsamples of firms that are expected to be more/less exposed to asymmetric information problems. Our results indicate that the effect of connections is significantly stronger for companies that suffer more of asymmetric information. This corroborates the idea that the lower level of underpricing for connected companies reflects better flow of information as opposed to favourable treatment by the underwriter. Tests on long run performance also indicate that connected companies' long-term returns are not significantly different from those of non-connected companies. This further confutes the notion that the lower level of underpricing for connected companies reflects favourable treatment by the underwriter.

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