The Geography of Institutional Investors, Information Production, and Initial Public Offerings
56 Pages Posted: 6 Nov 2016 Last revised: 13 Nov 2016
Date Written: November 6, 2016
We analyze how the geographical locations of institutions affect their investments in IPOs and various characteristics of the IPOs that they invest in. We argue that institutions geographically close to each other may influence each other’s investment decisions in IPOs. Further, they may also free-ride on each other's information when evaluating IPOs, resulting in IPOs dominated by geographically clustered institutions reflecting less accurate information signals compared to those dominated by geographically dispersed institutions. We test the implications of the above hypotheses using a measure of institutions' geographical dispersion. Our results can be summarized as follows. First, the equity holdings of institutions in IPOs are influenced more by the investments made by neighboring institutions than by those of distant institutions. An increase in the geographical dispersion of the institutions investing in an IPO is associated with higher IPO price revisions, higher IPO and immediate secondary market firm valuations, larger IPO initial returns, and greater long-run post-IPO stock returns. Further, consistent with an information channel driving the above results, we find that the extent of information asymmetry facing an IPO firm is decreasing in the geographical dispersion of institutions investing in its IPO. Finally, the predictive power of institutional trading post-IPO for subsequent long-run stock returns and earnings surprises for the first fiscal-year end after the IPO is greater for geographically isolated institutions compared to those that are geographically clustered.
Keywords: Institutional Investors, Information Production, Geography, Initial Public Offering
JEL Classification: G23, G14, G32
Suggested Citation: Suggested Citation