Social Ties and IPO Outcomes

Abstract

We examine the role of social ties in IPO underwriting syndicate formation and find that an investment bank is more likely to be included in the underwriting syndicate when it is connected to the IPO firm through interpersonal social ties between the respective executives and directors. These social ties generate better outcomes, consistent with a quid pro quo arrangement between the respective parties. The investment bank benefits by receiving higher compensation, a more senior role in the IPO, and greater share allocations. For the IPO firm, the presence of social ties between the IPO issuer and the chosen underwriters is associated with net wealth gains for its pre-IPO shareholders.