Social Capital and the Pricing of Initial Public Offerings

Using a large sample of 4,892 IPOs in the United States, we establish that the level of social capital in the county of the IPO firm’s headquarters is negatively associated with the level of IPO underpricing. The results hold for a range of robustness tests, including those addressing endogeneity. Additionally, the relation between social capital and IPO underpricing is weaker among IPO firms with less information uncertainty, and stronger for IPO firms with more agency problems. Last, we show that social capital is negatively associated with IPO firms’ earnings management. High social capital is also associated with a higher likelihood of the IPO being oversubscribed, higher total proceeds raised in the IPO, a greater number of IPO shares issued, and lower total IPO administrative fees. Overall, our results demonstrate the importance of social capital as an informal contracting mechanism in enhancing the pricing and performance of IPOs