Summary:
In contrast to existing literature that primarily focuses on Initial Public Offerings (IPOs), this study examines the impact of investor-underwriter relationships on investor bidding behavior in the Chinese Private Investment in Public Equity (PIPE) auction market. Financial investors in PIPEs confront a trade-off between the allocation probability and subscription cost in auctions. Typically, a higher bid price increases the chance of allocation. Nevertheless, given the stock’s intrinsic market value, a high bid price can increase subscription costs and reduce post-allocation profits. PIPE auctions operate under a non-discriminatory pricing method. The allocated investors subscribe to PIPE shares at the same issuance price, which is set based on the offering price quoted by the last investor allocated shares. Lead underwriters are more inclined to convey accurate information about the PIPE issuer to financial investors with whom they have close relationships. These investors are information arbitrageurs who capitalize on their informational edge to secure more favorable allocations. Conversely, investors without such access may inflate their bids to boost allocation chances. Using manually-compiled data on PIPE events and investor bidding in the Chinese market from January 1, 2016, to June 30, 2021, we find that the bidding premiums of financial investors closely related to underwriters are significantly lower. These financial investors are also more likely to acquire shares in PIPEs successfully. Moreover, the issuance discount is larger when they participate in PIPEs. We analyze the mechanism of this effect in several ways. We argue that financial investors with close ties to lead underwriters can accurately interpret investment recommendations from the underwriters’ analysts. Their information advantage is particularly valuable for firms with overly optimistic stock recommendations issued by PIPE underwriters’ analysts to facilitate underwriting business. We find that the bidding premium differences between those financial investors with close connections to the underwriters and those without are significantly lower for this subsample of firms. Similar lower bidding premium differences are observed in the subsample of firms with more earnings management, increased corporate violations, and deficient corporate governance. Informed financial investors have incentives to quickly profit from the information they acquire from the PIPE underwriters. We find that they can borrow pre-listing shares and sell them at a premium in the secondary market while subscribing to discounted PIPE shares. Financial investors with solid underwriter relationships are more likely to collaborate with the lead underwriter in executing a PIPE short-selling arbitrage strategy. This strategy allows them to realize the issuance discount between the market and issuance prices in advance, thereby securing short-term profits. Our study contributes to the literature by examining the influence of investor-underwriter relationships on investor bidding behavior within the Chinese auctioned PIPE market, characterized by substantial fundraising and a distinct pricing mechanism. Previous studies on IPOs had inconsistent results regarding bid levels, with some indicating higher bids due to stronger relationships (Huang et al., 2008; Jiang et al., 2022; Luo et al., 2023) and others suggesting the advantages of lower bids (Reuter, 2006; Binay et al., 2007; Henderson and Tookes, 2012). Our study, however, proposes that investors with solid ties to underwriters gain an informational edge, which results in lower bidding premiums in PIPEs. This insight addresses a significant gap in the current understanding of the PIPE market. Using manually-collected detailed investor bidding data, we explore the behavioral differences arising from relationship-driven information asymmetry. As information arbitrageurs, financial investors with close ties to lead underwriters enjoy higher allocation probabilities and more substantial issuance discounts. Additionally, their collaboration with lead underwriters in employing PIPE short-selling arbitrage strategies allows for the preemptive capture of issuance discounts and the realization of arbitrage profits. Investors lacking information may reluctantly inflate their bids to boost allocation chances. We use a large sample size and reveal more generalized insights beyond the specific case, which enhances theoretical and practical guidance. Our findings offer several policy implications for policymakers. Regulators should closely monitor the dynamics between investors and lead underwriters in PIPE transactions and their influence on bidding practices. It is imperative to regulate PIPE short-selling arbitrage strategies and effectively oversee the conduct of investors, underwriters, and market participants. Concurrently, policymakers should enhance market transparency to mitigate information arbitrage and free-riding caused by information asymmetry.
朱燕建, 徐嘉婧. 中国定向增发市场投资者与承销商关系对报价行为的影响研究[J]. 金融研究, 2026, 549(3): 187-206.
ZHU Yanjian, XU Jiajing. The Impact of Investor-Underwriter Relationships on Bidding Behavior in Chinese Private Investment in Public Equity Market. Journal of Financial Research, 2026, 549(3): 187-206.
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