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Allocations, Adverse Selection and Cascades in IPOs: Evidence from the Tel Aviv Stock Exchange
Yakov Amihud New York University - Stern School of Business Shmuel Hauser Ben-Gurion University of the Negev - School of Management; Government of the State of Israel - Israel Securities Authority Amir Kirsh Tel Aviv University - School of Computer Sciences January 2002 NYU Stern Department of Finance No. FIN-01-017 Abstract: This paper examines three theories of IPO underpricing, using data from Israel where the allocations to subscribers are equally prorated and publicly known. Rock's (1986) theory of adverse selection is supported: subscribers receive greater allocations in overpriced IPOs. And, while the average IPO excess return is 12%, the simulated allocation-weighted return to uninformed investors is slightly negative. Welch's (1992) theory of information cascades is supported by the pattern of allocations: demand is either extremely high or there is undersubscription, with very few cases in between. Also supported is the proposition that underpricing is a means to increase ownership dispersion.
Keywords: Initial public offerings, IPO underpricing JEL Classifications: G39 Working Paper SeriesDate posted: December 14, 2001 ; Last revised: July 14, 2009Suggested CitationContact Information
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