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
Date Written: February 19, 2016
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: Suggested Citation