Nº 20-68: Nepotism in IPOs: Consequences for Issuers and Investors

Potential conflicts of interest arise when IPO underwriters allocate IPO shares to their affiliated funds. We hypothesize that such nepotism incentives affect IPO pricing. Using a novel hand-collected dataset, we find support for this hypothesis in a regression discontinuity design (RDD): a one percentage point increase in affiliated allocations increases underpricing by 5.4 percentage points. Our evidence suggests that nepotism has real monetary costs for IPO issuers. We also use our dataset to revisit a milder version of nepotism analyzed in prior studies, and we find much clearer support for it than prior work: we find a strong positive association between IPO underpricing and affiliated allocations, which strengthens when nepotism incentives are stronger.