Collusive bidding: Evidence from China’s IPO bookbuilding mechanism reform

Abstract

This paper investigates the incentives behind investor collusion in China’s IPO market and assesses the effects of regulatory reforms on pricing efficiency. Our empirical evidence from registration-based IPOs in China between July 22, 2019 and December 31, 2022 highlights three key findings: first, before the bookbuilding mechanism reform, investors could coordinate to systematically depress offering prices below competitive levels; second, the reform, by granting underwriters greater discretion in pricing, reduced the expected payoff from collusive bidding to below that of competitive bidding, thereby substantially diminishing incentives to collude; third, as a result, the reform increased normalized offering prices by 0.885 units relative to underwriter benchmark prices and reduced first-day returns by 2.135 units. Overall, the findings highlight that enhancing underwriter discretion can be an effective policy tool to curb collusion and improve IPO pricing efficiency in emerging market.