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

Using a large sample of U.S. IPOs between 1999 and 2020, we show that personal connections between directors and top executives of issuers and those of underwriting banks result in significantly lower levels of IPO underpricing. We estimate the average effect to be about 13 percentage points. The results hold with several alternative robustness tests including non-random choice of underwriter, endogenous presence of venture capitalists, additional controls for managerial traits, matching exercises and doubly robust estimations. Our results indicate that the effect of connections is significantly stronger for companies that are more likely to suffer 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.