Key Investors in IPOs

Abstract

We statistically identify institutional investors who persistently hold the most underpriced US IPOs. As a group, these key investors' holdings are strongly related to IPO underpricing and offer price revisions, more so than any other variables. Key investors are better informed than other investors; their trades predict future returns and their participation more strongly relates to underpricing when they specialize in the IPO firm's industry. We find no direct evidence that key investors' participation is motivated by underwriters' earning kickbacks. However, a significant fraction of the economic benefits of underpricing accrues to non-key investors, allowing for agency-based explanations for underpricing.

Keywords: IPO Underpricing, Institutional Investors, Underwriters

JEL Classification: G23, G24, G32