Do Firms Get What They Pay For? A Second Thought on Over-Allotment Option in IPOs

Posted: 19 Feb 2016 Last revised: 17 Mar 2017

See all articles by Emanuele Bajo

Emanuele Bajo

University of Bologna - Department of Economics

Massimiliano Barbi

University of Bologna - Department of Management

Giovanni Petrella

Università Cattolica del Sacro Cuore

Date Written: February 19, 2016

Abstract

The over-allotment option usually complements an IPO to meet any excess demand and provides underwriters with an incentive to stabilize stock prices in the aftermarket. This clause represents an additional source of compensation to the investment bank, in exchange of some uncertain positive outcomes to the issuing firm. In this paper we provide evidence of the effects of the over-allotment option on underwriting fees, IPO underpricing, and price stabilization, and we document that, contrary to our expectations, this clause does not reduce the underwriting fees and the IPO underpricing, and it does not increase the aftermarket stabilization.

Keywords: Over-Allotment Option; IPO; Price Stabilization; Underpricing

JEL Classification: G14, G32

Suggested Citation

Bajo, Emanuele and Barbi, Massimiliano and Petrella, Giovanni, Do Firms Get What They Pay For? A Second Thought on Over-Allotment Option in IPOs (February 19, 2016). Quarterly Review of Economics and Finance, Vol. 63, pp. 219-232, 2017. Available at SSRN: https://ssrn.com/abstract=2734632

Emanuele Bajo

University of Bologna - Department of Economics ( email )

Bologna
Italy

Massimiliano Barbi (Contact Author)

University of Bologna - Department of Management ( email )

via Capo di Lucca 34
Bologna, 40126
Italy
+39 051 2098404 (Phone)
+39 051 246411 (Fax)

HOME PAGE: http://www.sites.google.com/site/massimilianobarbifinance/

Giovanni Petrella

Università Cattolica del Sacro Cuore ( email )

Largo Gemelli 1
Milano, 20123
Italy
+39 02 72343007 (Phone)

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