Why Do IPO Issuers Grant Overallotment Options to Underwriters?

45 Pages Posted: 17 Nov 2013 Last revised: 11 Dec 2014

See all articles by Yawen Jiao

Yawen Jiao

University of California, Riverside

Kenji Kutsuna

Kobe University - Graduate School of Business Administration

Richard L. Smith

University of California, Riverside - Anderson Graduate School of Management

Date Written: December 10, 2014

Abstract

In contrast to prior studies suggesting that overallotment option (OAO) provisions reflect underwriters’ exploitation of IPO firms, we provide evidence that they benefit both issuers and underwriters. We estimate that OAO provisions lead to lower underwriting fees, less underpricing, less negative post-IPO performance, lower post-IPO volatility and larger IPOs. OAO provisions are more likely for large firms undertaking relatively large IPOs, especially where a large portion of the shares are offered by selling shareholders. Our evidence also indicates that managers and other insiders may benefit if their shareholdings would be locked up unless the OAO call option feature was exercised.

Keywords: Overallotment options; Initial public offering; IPO pricing; Underpricing

JEL Classification: G20; G24; G32; L14

Suggested Citation

Jiao, Yawen and Kutsuna, Kenji and Smith, Richard L., Why Do IPO Issuers Grant Overallotment Options to Underwriters? (December 10, 2014). Available at SSRN: https://ssrn.com/abstract=2354476 or http://dx.doi.org/10.2139/ssrn.2354476

Yawen Jiao (Contact Author)

University of California, Riverside ( email )

Riverside, CA 92521
United States

Kenji Kutsuna

Kobe University - Graduate School of Business Administration ( email )

2-1, Rokkodai-cho, Nada-ku
Kobe, 657-8501, 657-8501
Japan

HOME PAGE: http://www.b.kobe-u.ac.jp/en/staff/kutsuna.html

Richard L. Smith

University of California, Riverside - Anderson Graduate School of Management ( email )

Riverside, CA 92521
United States
951-827-3554 (Phone)

HOME PAGE: http://www.agsm.ucr.edu/

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