Double Intermediation in IPOs: Double the Trouble?

Abstract

This study investigates the role of repeated interactions between venture capital firms and unaffiliated investment banks in the IPO process. Our main findings are threefold. First, we find strong evidence of venture capital investors’ influence on their portfolio firms’ underwriter choice towards relationship banks. Second, relationship banks are more likely to underwrite IPOs with more severe information asymmetry and agency problems. Finally, underpricing is significantly lower if the IPO is underwritten by a relationship bank, driven by both a reduction in information asymmetry problems and a better alignment of incentives. Overall, our results indicate that relationships play a beneficial role in the IPO process.