The Effect of ‘Underwriter–Issuer’ Personal Connections on IPO Underpricing

Using a large sample of initial public offerings in the U.S. we show that personal connections between directors and top executives of issuers and underwriting banks result in significantly lower levels of IPO underpricing. We estimate the average effect to be about 12 percentage points. The results hold with several alternative robustness tests including additional controls for managerial traits, matching exercises and doubly robust estimation. 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 from asymmetric information problems. This corroborates the idea that the lower level of underpricing for connected companies reflects better flow of information with the underwriter.