The benefits and costs of underwriters’ social capital in the US initial public offerings market

Abstract

This study explores the factors that influence the degree to which brokers in mediated markets employ their social capital to benefit either buyers or sellers in the context of underwriters’ involvement in the US initial public offerings (IPO) market. This study finds that the embeddedness of the lead underwriter with institutional investors in an IPO deal network is negatively associated with IPO stock underpricing when demand for the offering is low, thereby benefiting the seller, but is positively associated with the amount of underpricing when demand for the IPO is high, thereby benefiting the buyers. High underwriter embeddedness with institutional investors also reduces the negative relationship between underwriters’ reputation and underpricing. © 2004, Sage Publications. All rights reserved.