Over the last few decades, large asset managers have loomed over U.S. equity markets. Their prominence has fueled a lively debate about the effects of “asset manager capitalism” on a variety of issues, including corporate governance and stewardship, market competition, and ESG considerations. In a new paper, we bring this conversation to capital formation itself. We show that the three giants – BlackRock, Vanguard, and Fidelity – are an underappreciated cause of IPO underpricing.
A Familiar Phenomenon at Unusual Scale
IPO underpricing – the difference between the offer price and the first day closing price of a newly public company’s stock – has long been a feature of public markets. What has changed is its magnitude. Between 2010 and 2023, average first-day returns of the stock reached approximately 25%, compared with 7–15% in earlier decades. Across roughly 3,000 U.S. IPOs in the period, this translates into about $90 billion in aggregate proceeds foregone proceeds – capital that flowed from issuers and pre-IPO shareholders to investors who received allocations.
High-profile offerings illustrate the trend: The stock of Airbnb, Snowflake, DoorDash, and Rivian each had first-day gains exceeding $2 billion. These figures are large in absolute terms, yet they reflect a broader structural shift rather being anomalies.
Traditional explanations for IPO underpricing – information asymmetries, issuer signaling, underwriter–issuer agency conflicts, and ownership and control theories – remain helpful yet struggle to explain the recent surge in underpricing. In fact, the realities of modern capital markets – the dominance of the book-building method, which was originally designed to mitigate some classic sources of underpricing, and the prevelance of sophisticated institutional investors on the order book – should have led to less underpricing. Instead, levels have risen. This puzzle motivates our inquiry.
Why Focus on Active AUM?
BlackRock, Vanguard, and State Street have come to be known as the Big Three because of the large amount of their assets under management and the dominance of passive index funds. Our focus is different. Primary-market IPO allocations are the domain of active funds. Index-tracking funds generally cannot buy at the offering because newly public firms are not yet included in the benchmark index.
Because the relevant buyers at the IPO are large, active mutual funds, we define the operative trio as BlackRock, Vanguard, and Fidelity. Fidelity’s active equity AUM and repeat participation make it a central, price-relevant buyer in IPOs. By contrast, State Street investors are predominantly passive, and its direct role in IPO allocations is comparatively limited. Throughout, we therefore use “Big Three” to mean the asset managers with the largest actively managed equity pools: BlackRock, Vanguard, and Fidelity.
Our Thesis
Our proposition – supported by empirical evidence – is that the ascent of certain asset-management behemoths, which control unprecedented pools of capital and exert enormous influence over financial markets, has endowed them with substantial direct and indirect market power. Their direct power stems from sheer order size and ubiquity across offerings. Their indirect power reflects their role as providers of valuable pricing feedback – functioning more as price-makers than price-takers. Their indications of interest, bidding strategies, and communications with underwriters and issuers shape both the price range of a stock when the IPO is filed with the SEC and the final offer price. Indirect power also derives from long-horizon “preferred holder” status and lucrative multi-line relationships with underwriters. Taken together, these factors can be strategically leveraged in IPOs to tilt price discovery in their favor and depress offering prices below competitive levels. We expect this effect to be most substantial when all of the Big Three participate in an offering.
Data and Design
We assemble a dataset of 2,692 U.S. IPOs (excluding the dot-com years), merging SDC/WRDS IPO data, first-day closing prices, Compustat fundamentals, and institutional holdings from 13F filings in the first post-IPO quarter. Because order books and allocations are confidential, post-IPO 13F ownership is a standard proxy for participation.
We examine the association between simultaneous Big Three participation and underpricing, controlling for IPO size, industry, year fixed effects, and bookrunner fixed effects. To sharpen identification, we exploit the JOBS Act–era expansion of test-the-waters (TTW) communications, which allowed emerging growth companies (EGCs) to solicit institutional feedback before setting a filing-price range. This reform substantially increased institutional investors’ ability to shape the preliminary range and, ultimately, the offering price.
Findings
- The joint participation of the Big Three increases underpricing levels. IPOs with simultaneous participation by BlackRock, Vanguard, and Fidelity exhibit 16.7 percentage points higher underpricing on average. With IPO size, industry, year, and bookrunner controls, the effect remains substantial at about 9.7–15 percentage points, depending on specification. This is not a niche corner of the market: 614 IPOs (22.8% of the sample) have all three participating.
- The effect grows over time. The association intensified in 2012–2022, consistent with rising concentration and influence among the largest managers.
- TTW amplifies pricing power. In the 2012–2019 window, when only EGCs could use TTW, TTW IPOs show 8.4 percentage points more underpricing than non-TTW IPOs. Within TTW deals, Big Three presence is associated with an additional (directionally consistent) 8.3 percentage points of underpricing (measured imprecisely given sample size).
- Not a selection story. We do not find abnormal post-IPO returns that would indicate simple selection into already underpriced issues. The pattern is consistent with price impact, not superior foresight.
Mechanisms That Drive the Effect
- Price-setting role of large repeat bidders. In book-building, iterative feedback from “must-have” institutions heavily influences the filing range and final price. When those institutions are few, large, and present across most deals, their downward pressure travels.
- Preferential allocation combined with multi-line relationships between underwriters and institutional investors. Underwriters have discretion to allocate shares to long-term, revenue-generating clients. That fosters a stable channel through which conservative bids by powerful investors can still win allocations, sustaining incentives to threaten low demand.
- Information sharing and signaling. During TTW and roadshows, investors may share analyses or infer book conditions – directly or via underwriters, an act that is not explicitly restricted. Parallel feedback can become coordinated in practice, even without explicit agreements.
- Governance “pricing” convergence. Where large institutions publicly align on governance structures often adopted at the IPO stage (e.g., multi-class voting, staggered boards), those common positions can translate into similar price feedback – again depressing offering prices in affected deals.
Policy Recommendations
- Size limits on AUM. Capping the AUM of any single asset manager would reduce both direct pricing power and the feasibility of tacit coordination among a small set of dominant buyers. While we acknowledge implementation challenges and tradeoffs, we believe that the potential efficiency gains in capital formation would be substantial.
- Increase transparency in book-building offerings. Today’s capital markets are opaque: neither researchers nor the SEC routinely sees bids and allocations. We propose post-pricing disclosures of anonymized bid distributions (or confidential reporting to the SEC), enabling detection of systematic conservative-bid allocations and other red flags without undermining real-time price discovery.
- Targeted limitations on pre-pricing communications. Curbing price-related communication among the largest institutions during TTW communication and roadshows, where parallel feedback is likely to anchor filing ranges and final offer prices downward.
Relation to the Literature
Our perspective complements and extends three strands of research:
- Information asymmetry and mechanism design. Classic models (Rock; Benveniste–Spindt) predict that better investor communication should reduce underpricing. We show that in the current primary market landscape, more communication can entrench downward price pressure.
- Underwriter–issuer agency problem. Evidence that underwriters favor revenue-generating buy-side clients helps explain why conservative bids by powerful investors still receive generous allocations – sustaining a low-price equilibrium.
- Common ownership & market power. Prior work highlights the potential anticompetitive effects of concentrated common ownership in product and labor markets. We locate a related distortion in capital markets, where institutional investors themselves comepte with each other.
Danielle Chaim is an assistant professor at Bar Ilan University – Faculty of Law. Adi Libson is a professor at Bar Ilan University – Faculty of Law. Yevgeny Mugerman is an associate professor at the Bar Ilan University School of Business Administration. This post is based on their recent paper, “The Price of Power: The Big Three and IPO Underpricing,” available here.