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Posted 10.29.15

Associate Dean of Research and Associate Professor of Banking and Finance Leonardo Madureira, PhD, examines the role of interpersonal social ties between investment banks and the initial public offering (IPO) firm in determining the composition and characteristics of the IPO underwriting syndicate in Social Ties and IPO Outcomes, published in the August 2015 issue of the Journal of Corporate Finance.

In this article, the authors measure social ties between two firms based on linkages among their executives and directors. These links may be established by relationships formed through overlapping periods in past employment or education background predating the IPO date. The authors show that an investment bank is more likely to be hired to take a company public when it is connected to the IPO firm through social ties. These social ties generate better outcomes, consistent with a quid pro quo arrangement between the respective parties. The investment bank benefits by receiving higher compensation, a more senior role in the IPO, and greater share allocations. For the IPO firm, the presence of social ties between the IPO issuer and the chosen underwriters is associated with net wealth gains for its pre-IPO shareholders.

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