Research on Dual Agency Behavior of Sponsoring Institutions and IPO Pricing Efficiency

China's registration-based IPO reform adopted a scientific path. The strategy was “piloting first, reforming new sectors before existing ones, and rolling out gradually.” It started as a pilot on the STAR Market. The reform is now fully implemented. This process has deepened steadily. The STAR Market adopts a market-oriented pricing mechanism. It determines the issue price through inquiry. It also uses a sponsoring and underwriting mechanism for issuance management. Regulatory authorities no longer directly audit IPO quality. Information authenticity relies heavily on intermediary supervision. This includes internal controls by issuers and due diligence by sponsors. To consolidate intermediary responsibilities, the STAR Market innovatively introduced the co-investment system. This rule requires sponsors to use their own funds to subscribe to listed companies' shares. The co-investment ratio is between 2% and 5%. It also has a 24-month lock-up period. However, existing literature mainly studies this system from specific aspects. These include investor sentiment, underwriter reputation, and willingness to co-invest. Theoretical discussions still mostly view sponsors through a “single identity”. Previous studies evaluate the policy primarily from a “buyer” perspective. They fail to comprehensively consider the sponsor's simultaneous role as a securities “seller”. This single-perspective limitation provides a new starting point for our study. It leads to our core research question. Can the co-investment system drive IPO pricing toward fair value under the registration-based regime? Under this system, sponsors take on an additional role as stock “buyers”. As “buyers”, they have strong motives to lower IPO prices. A lower price reduces initial investment costs and lowers the risk of falling below the issue price. Furthermore, it offers potential investment gains from a post-IPO price surge. As “sellers”, they have strong motives to raise IPO prices. A higher price secures higher underwriting fees and maximizes current profits. The dual role creates a complex dual agency problem. It forces underwriters to balance between raising and lowering prices. They do this to find an equilibrium of interests. To answer this question, we select 571 companies listed on the STAR Market from July 2019 to May 2025 as our sample. We focus on the dual identity of sponsors as both “sellers” and “buyers”. We explore how this dual agency problem affects IPO pricing efficiency. In our research design, we adopt the perspective of a “rational economic agent”. We theoretically analyze the interest game under this dual role. We innovatively use the sponsors' initial net income to measure their equilibrium choice. This metric is the difference between underwriting fees and co-investment costs. We accurately measure pricing efficiency using the absolute log deviation between the first-day closing price and the average offline institutional bid. Based on this measure, we test its causal impact on IPO pricing efficiency. Our research finds that the co-investment system exacerbates agency conflicts. However, the drive for profit maximization creates a dynamic equilibrium of internal constraints. This ultimately guides IPO valuation and pricing toward fair value. Specifically, a higher initial net income leads to higher IPO pricing efficiency. Sponsors face a contradiction of wanting both high and low prices. This contradiction weakens their opportunistic motives. It reduces non-market interference and makes IPO pricing more reasonable. In the mechanism tests, investor opinion divergence is the core transmission path. This manifests as a higher standard deviation of offline bids and a lower first-day turnover rate. A high initial net income prompts underwriters to transmit true information. This effectively breaks the false consensus of “collusive underpricing” among primary market institutions. It reasonably increases bid differences. Consequently, it compresses arbitrage space from the source. This guides secondary market expectations to converge and reduces the first-day turnover rate. Regarding heterogeneity, the enhancement effect is more significant in certain samples. These include firms with high lead underwriter reputation, high analyst attention, and low investor attention. This shows that reputation constraints and analyst supervision play a positive reinforcing role. Conversely, excessive irrational attention from retail investors creates “price pressure”. This hinders the improvement of pricing efficiency. In further research, we explore the market-oriented effects of IPO pricing. We confirm that the dual agency game can increase holding-period excess returns in the short term. However, this driving effect weakens over time due to complex market dynamics. Investors should beware of short-term overvaluation risks. These risks arise from “price support” behaviors by sponsors during the co-investment period. Compared to existing research, our marginal contribution breaks the previous unidirectional evaluation framework. We use the sponsors' dual identity as a starting point. We comprehensively consider the impact of the dual agency role on IPO pricing efficiency. Additionally, we innovatively use initial net income as the key metric for interest trade-offs. We theoretically and empirically affirm the pricing fairness of sponsors under this special dual agency behavior. This provides a new theoretical perspective and empirical support for understanding the micro-governance utility of intermediaries under the reform. It greatly enriches the literature on the co-investment system and IPO pricing.