The Effect of Banking Relationships on the Firm's IPO Underpricing



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    • Schenone is with the Finance Department, University of Minnesota. I am grateful to my advisors, Kathleen Hagerty, Mitchell Petersen, and William Rogerson for their advice, comments and suggestions. I am also indebted to Luca Benzoni, Federico Ciliberto, Richard Green (the editor), Andy Winton, and to an anonymous referee for insightful comments and suggestions. I thank Jonathan Berk, Arnoud Boot, Stijn Claessens, Dino Gerardi, Laurie Krigman, Patricia Langhor, Hayne Leland, Ross Levine, Hamid Mehran, Roni Michaely, Wayne Mikkelson, Patricia Mosser, Enrico Perotti, Todd Pulvino, Mark Rubinstein, Paola Sapienza, and Jim Wilcox for helpful discussions. Seminar participants at UC Berkeley; Carnegie Mellon Graduate School of Industrial Administration; University of Minnesota; New York Federal Reserve Bank; University of Oregon; University of Wisconsin-Madison; Washington University-St. Louis; University of Amsterdam; Tilburg University; University of Toronto; Warwick University; and at the Second EVI Conference at New York Univeristy have enriched this paper. I thank Patricia Ledesma for her help with the data work. I acknowledge financial support from the Graduate Research Grant from Northwestern University, and the CSIO Scholarship at Northwestern University. All errors and omissions remain my own.


This paper investigates the effects of pre-IPO banking relationships on a firm's IPO. Using a new and unique data set, which compares the firm's pre-IPO banking relationships to the underwriters managing the firm's new issue, I test whether banking relationships established before the firm's IPO ameliorate asymmetric informa tion problems behind high IPO underpricing. The results show that firms with a pre-IPO banking relationship with a prospective underwriter face about 17% lower underpricing than firms without such banking relationships. These results are robust to controlling for the firm's endogenous selection of the pre-IPO banking institution.