Nepotism in IPOs: consequences for issuers and investors

IPO underwriters have an incentive to underprice IPOs when they allocate IPO shares to their affiliated funds. Using a novel hand-collected dataset, we find that such nepotism incentives affect IPO pricing. In a regression discontinuity design (RDD) we find that a one percentage point increase in affiliated allocations increases underpricing by 5.4 percentage points. Our evidence suggests that nepotism has real consequences for IPO issuers. We also revisit a milder version of nepotism analyzed in prior studies and find much stronger support for it than prior work.