IPO Bubble Collusion: A Classroom Exercise

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Kwak, Sungkyu
Hull, Robert M.
Walker, Rosemary
Washburn University. School of Business
Kaw Valley Bank
Issue Date
February 2007
Alternative Title
During the Internet IPO bubble at the turn of the century, underwriters and their preferred customers reaped record profits. it is alleged that collusion between these two groups of investors helped fueled these huge IPO profits. As IPO prices skyrocketed, other investors jumped on the bandwagon in an attempt to make their own profits. Their efforts met with disaster when stock prices nosedived after they acquired shares. Collusion has been blamed for their disastrous results. This paper offers a classroom exercise for economics and finance classes that allow students to experience the collusion that was reported as occurring during the IPO bubble. This is achieved through simulating how preferred customers purportedly received favored treatment in the distribution of shares in exchange for taking part in schemes of buying and selling shares in the aftermarket.