Do Underwriters Compete in IPO Pricing?

We propose and implement, for the first time, a direct test of the hypothesis of oligopolistic competition in the U.S. underwriting market against the alternative of implicit collusion in IPO price setting. We construct two models of an IPO underwriting market: in the first one IPO underwriters set their fees competitively, while in the second one they coordinate (collude) in setting fees. The two models lead to different equilibrium relations between market shares and compensation of underwriters of different quality on one hand, and the state of the IPO market on the other hand. We use 39 years’ worth U.S. IPO data to examine which of the two models is better aligned with the data. Our empirical results are generally consistent with the implicit collusion hypothesis – underwriters, especially the larger ones, do not seem to always engage in price competition for underwriting business. ∗We are grateful to Jonathan Berk, Tom Chemmanur, Jack He, Jieying Hong, Ronen Israel, Vladimir Ivanov, Shimon Kogan, Zheng Liu, Tingjun Liu, Alexander Ljungqvist, Roni Michaely, Tom Noe, Manju Puri, Uday Rajan, Jay Ritter, Susan Shan, Fenghua Song, William Wilhelm, and participants of the 2013 Interdisciplinary Center Summer Finance Conference, 2014 Financial Intermediation Research Society Meetings, 2014 China International Conference in Finance, and 2014 Northern Finance Association Meetings for helpful comments and suggestions, and to Jay Ritter for sharing IPO data. We also appreciate Erica Li’s input in the early stages of the project. We acknowledge the receipt of the CFA best paper award at the 2014 Northern Finance Association Meetings. †Singapore Management University, [email protected]. ‡Boston University and IDC, lyandres @bu.edu.