It is widely accepted that quid pro quo or favoritism exists in bookbuilding IPOs where the securities underwriter has share allocation discretion, and that auctioned IPOs should be largely free from quid pro quo because the underwriter does not have share allocation discretion. Using proprietary data on IPO auctions from China and a regulatory regime change on share allocation, we show that when the share allocation rule shifts from pro rata to lottery draw (that makes quid pro quo valuable to (...) a bidder), mutual fund families having stronger pre-shift brokerage commission ties with the underwriter submit bids later, place more strategic bids, have more bids qualified for the allocation round, and are more likely to receive share allocation than other fund families. These patterns are not apparent in fund families that possess a robust business culture. The evidence is consistent with the existence of quid pro quo in IPO auctions facilitated by the underwriter’s leakage of confidential bidding information in some fund family and underwriter pairs. This unethical practice not only creates conflicts of interest, jeopardizes fair play, but also discourages information production and affects accurate valuation. (shrink)

ABSTRACTResearch on the development of selective trust has shown that young children do not indiscriminately trust all potential informants. They are likely to seek and endorse information from individuals who have proven competent or benign in the past. However, research on trust among adults raises the possibility that children might also be influenced by the emotions expressed by potential informants. In particular, they might trust individuals expressing more positive emotion. Indeed, young children’s trust in particular informants based on their past (...) behaviour might be undermined by their currently expressed emotions. To examine this possibility, we tested the selective trust of fifty 4- and 5-year-olds in two steps. We first confirmed that children are likely to invest more trust in individuals expressing more positive emotion. We then showed that even if children have already formed an impression of two potential informants based on their behavioural record, their choices about whose claims to trus... (shrink)