When Gatekeepers Enlist Help: Underwriters Hiring Intermediaries and IPO Underpricing

Abstract In the context of IPOs in China, where underwriters engage information intermediaries such as accounting firms, law firms, and consulting firms, our study finds that underwriters are more likely to hire intermediaries in IPO firms with higher information asymmetry, and such engagement can reduce IPO underpricing. Channel tests indicate that underwriters’ engagement of intermediaries can improve underwriters’ independence and professional capabilities, reduce information asymmetry between issuers and investors, and ultimately lower IPO underpricing. Additionally, we document that underwriters receive higher underwriting fees, and the IPO duration is shortened when intermediaries are hired. Furthermore, a greater number of intermediaries engaged by underwriters is associated with more significant reductions in IPO underpricing. Hiring accounting firms and law firms has a stronger mitigating effect on underpricing, and closer cooperation between underwriters and intermediaries results in lower IPO underpricing. Finally, regulatory forces further strengthen the role of underwriters hiring intermediaries in reducing IPO underpricing.