Shares' Allocation and Claw Back Clauses in Italian IPOs
37 Pages Posted: 9 Mar 2008 Last revised: 18 Dec 2010
Date Written: February 2008
We analyse 161 Italian IPOs on the Italian Stock Exchange in the period 1999-2007, focusing on the empirical praxis of share allocations by underwriters. In Italy, one offering (the public one) is reserved for retail investors and is conducted according to Italian regulation, while the second (the institutional one) is reserved for institutional investors and is usually implemented according to Regulation S and Rule 144A of the Securities Act. Effective allocation proportions between the two offerings are determined at a high level of syndicate discretion, setting aside the minimum amount for the public offering. Claw back clauses, a typical device of Italian IPOs, allow the syndicate to shift shares ex post from the retail to the institutional offering and vice versa in order to manage demand in a discretionary fashion. We document significant increases of the retail offering size ex post and show that this mostly happens at times of preceding negative market performance and in weaker IPOs marked by lower institutional demand, a higher proportion of the offering coming from selling shareholders and significantly lower levels of initial underpricing. As a result, retail investors end up buying more shares only in weaker and less profitable IPOs, raising inevitable questions as to the fairness of the use of the claw back clauses in Italian public offerings.
Keywords: IPOs, underpricing, bookbuilding, allocations, claw back clauses, oversubscription
JEL Classification: G24, G32, G38, K12, K22
Suggested Citation: Suggested Citation