Raising Capital with Uncertainty: Overpricing Initial Public Offering for Science-Based Firms with Multiple Ties to the Food and Drug Administration
I study the effect of indirect ties between the firm's scientific advisory board members and the Food and Drug Administration advisory committees on underwriter prestige, underwriting fee, underpricing and the initial offering price range for firms pursuing highly uncertain opportunities. Prestigious underwriters compete to underwrite securities offered by firms connected to the regulator. This result in overpricing even though the underwriter seeks to enforce underpricing. The findings contribute to the Coase-Knight debate about the role of uncertainty for firm boundaries.