The differential impact of the bank–firm relationship on IPO underpricing: evidence from China

• The sample covers the era when Big Four banks in China have dramatically improved their efficiency and performance.
• The bank–firm relationship mitigates IPO underpricing in China.
• The relationship between Chinese firms and banks with high credit quality more effectively mitigates IPO underpricing.
• The relationship between Chinese firms without political connections and banks more effectively mitigates IPO underpricing.
• The information of political connection variables and state ownership only overlaps partially.

This study investigates the impact of the bank–firm relationship on IPO underpricing in China, an emerging economy with a bank-dominated financial system. Utilizing a hand-collected loan data for 902 Chinese IPO firms from 2004 to 2011, we document that the bank–firm relationship reduces the degree of IPO underpricing. Both the lender's and the borrower's firm characteristics affect the signal quality of the bank–firm relationship, resulting in differential impacts on IPO underpricing. The relationship between firms and banks with high credit quality or the relationship between politically unconnected firms and banks has a more positive impact on mitigating IPO underpricing.