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| Local Relationship Underwriting and Market Pricing Efficiency |
| YU Fengyan, LIANG Qi
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School of Economics & Management, Tianjin University;
School of Economics, Nankai University |
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Abstract Underwriting in Chinese stock market has the characteristic of ‘local oligopolies’. Utilizing selection bias adjustment model, this paper investigates the local relationship underwriting in China. We find that, firstly SOEs and investment banks with poor reputation are more likely to engage in the local relationship underwriting, and local relationship underwriting takes place more frequently in the less market-oriented regions. Secondly, local relationship underwriting can significantly reduce IPO underpricing and improve the issuers’ financial performance, which means that local relationship has played a certification role and investors have the ability to identify such relationship capital. Thirdly, using territorial jurisdiction and ownership as the relationship intensity measurement, we find an inverted U-shaped relation between the local relationship intensity and IPO underpricing, and only when the local governments serve as the issuers’ final controller can the positive performance effects be observed. Our findings have important policy implications for improving the quality of underwriting services in Chinese stock market.
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Received: 16 June 2016
Published: 18 January 2018
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