The meteoric rise of asset management giants over the last two decades has ignited intense scrutiny among legal scholars and economists. The control wielded by these behe-moths over vast capital pools and their outsized influence over corporate America is ar-gued to pose myriad economic, social, and corporate governance challenges. In this Arti-cle, we uncover a critical yet overlooked arena in which the concentration in the asset management industry and the rising dominance of giant institutional investors manifest additional deleterious consequences: capital markets, specifically in the context of Initial Public Offerings (IPOs).
We present empirical evidence that concentrated market power in the hands of a core group of giant asset managers has exacerbated IPO underpricing—defined as the differ-ence between the offer price and the stock’s closing price on the first day of trading. Our analysis indicates that from 2002 to 2022, the simultaneous participation of the three larg-est asset managers—BlackRock, Vanguard, and Fidelity—in IPOs increased underpricing levels by an average of 16.7 percentage points. Even after controlling for IPO size, bookrunner, industry, and year fixed effects, this impact remains substantial at 9.7 per-centage points.
The participation of such market-moving institutional investors can drive up under-pricing through various mechanisms. Our analysis pinpoints several channels through which these investors signal their bidding intentions, share information, and even coordi-nate their positions during the IPO process. Some of these mechanisms warrant closer scrutiny, as they may constitute collusive behavior by institutional investors in their role as competing bidders in IPOs—potentially violating antitrust laws.
Our novel analysis of underpricing through the lens of institutional-investor market power adds a crucial piece to the IPO underpricing puzzle and illuminates the marked correlation between rising underpricing levels and the ascendancy of asset manager cap-italism. Notably, over the past decade, underpricing has soared to extraordinary levels, resulting in an unprecedented $90 billion left “on the table” by issuers. To counteract this effect of asset manager capitalism, we propose a three-pronged approach: first, introduc-ing market-structure changes to limit the size and curb the market power of asset managers; second, enhancing transparency within the book-building process; and third, imposing communication restrictions among prospective bidders during the pricing pro-cess.