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Political connections and IPO underpricing: An efficiency problem

Gounopoulos, Dimitrios and Kallias, Konstantinos and Newton, David and Tzeremes, Nickolaos (2016): Political connections and IPO underpricing: An efficiency problem.

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We frame IPO pricing as an efficiency problem for prospective issuers and explore the effect of connections formed via lobbying and PAC (Political Action Committee) contributions. We develop an approach of general application in finance, where relationships of influence are suspected. Rather than imposing a regression-based framework, we allow relationships to manifest themselves in a data-driven manner. Our analysis reveals nonlinearities between IPO pricing efficiency and the two contribution avenues (justifying the fully nonparametric treatment). We are able to uncover relationships separately according to business sector, which we interpret in terms of varied competitive environments.

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