IPO Allocations: Discriminatory or Discretionary?

56 Pages Posted: 21 Jul 2001

See all articles by Alexander Ljungqvist

Alexander Ljungqvist

Centre for Economic Policy Research (CEPR); Swedish House of Finance; European Corporate Governance Institute (ECGI)

William J. Wilhelm

University of Virginia - McIntire School of Commerce

Multiple version iconThere are 5 versions of this paper

Date Written: July 2001

Abstract

We estimate the structural links between IPO allocations, pre-market information production, and initial underpricing returns, within the context of theories of bookbuilding. Using a sample of both US and international IPOs we find evidence of the following:

- IPO allocation policies favour institutional investors, both in the US and worldwide.

- Increasing institutional allocations results in offer prices that deviate more from the indicative price range established prior to bankers' efforts to gauge demand among institutional investors.

- Constraints on the discretion bankers exercise in the allocation of IPO shares reduce institutional allocations.

- Constraints on allocation discretion result in smaller price revisions. We interpret this as indicative of diminished information production.

- Initial returns, which reflect a significant indirect cost of going public, are directly related to our measure of information production and inversely related to the fraction of shares allocated to institutional investors. Our results indicate that discretionary allocations promote price discovery in the IPO market and reduce issuance costs for firms attempting to go public.

Keywords: Initial public offerings, bookbuilding, underpricing, intermediation

JEL Classification: G32

Suggested Citation

Ljungqvist, Alexander and Ljungqvist, Alexander and Wilhelm, William J., IPO Allocations: Discriminatory or Discretionary? (July 2001). AFA 2002 Atlanta Meetings; CEPR Disc. Paper No. 2855, Available at SSRN: https://ssrn.com/abstract=276413

Alexander Ljungqvist (Contact Author)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

William J. Wilhelm

University of Virginia - McIntire School of Commerce ( email )

Rouss & Robertson Halls, East Lawn
P.O. Box 400173
Charlottesville, VA 22904-4173
United States
434-924-7666 (Phone)
434-924-7074 (Fax)

HOME PAGE: http://gates.comm.virginia.edu/wjw9a/

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