Underwriters Association Conflict Of Interest Between Direct Investment Effect

Companies backed by venture capital affiliated to the underwriter may have two levels of IPO underpricing effect. First level is the certification effect or adverse selection/grandstanding effect brought from venture capital participation. Second level may be the conflict of interest effect because of the security firm’s dual role in the IPO.This paper takes550samples from the Chinese stock market, which range from Oct2009to Feb2012. From the empirical studies, this paper finds the following results:(1) VC-backed companies show higher IPO underpricing than non VC-backed companies, which is consistent with the adverse selection effect. VC-backed companies in Growth Enterprise Market will attract underwriters with higher reputation, which reduces IPO underpricing.(2) From the perspective of the whole sample, companies backed by VC affiliated to underwriters have no significant underpricing effect compared with other VC-backed companies.(3) From the perspective of direct investment interests, it shows conflict of interest effect. If VC affiliated to underwriters invests more money in the company, it shows higher IPO underpricing.(4) Case study also shows that company backed by direct investment subsidiaries of underwriter have higher underpricing than those backed by LP fund affiliated with the underwriter.