You Scratch My Back and I Scratch Yours : Evidence on Relationship-Based Bidding in IPO Pricing

Using a unique data set for a large sample of institutional bids for Chinese IPOs, we study how relationships with lead underwriters impact mutual funds’ willingness to bid in the bookbuilding process. Our paper finds that strong business ties lead to higher bid prices. The effect is more pronounced among IPO firms that receive less market attention and is mitigated for IPOs certified by reputable intermediaries. Though higher business ties lead to higher final offer prices, they are associated with poorer stock performance after IPO. We propose several potential mechanisms on this relationship-based bidding