Institutional Allocation in Initial Public Offerings: Empirical Evidence

Posted: 28 Nov 2001

See all articles by Reena Aggarwal

Reena Aggarwal

Georgetown University - Robert Emmett McDonough School of Business

Nagpurnanand Prabhala

The Johns Hopkins Carey Business School

Manju Puri

Duke University - Fuqua School of Business; NBER; FDIC

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Abstract

We analyze institutional allocation in initial public offerings (IPOs) using a new dataset of US offerings between 1997 and 1998. We document a positive relation between institutional allocation and day 1 IPO returns: for instance, institutions get under 60% of overpriced issues but about 75% of underpriced issues. The positive relation is partly explained by the practice of giving institutions more shares in IPOs with strong pre-market demand, as predicted by book-building theories. However, our tests suggest that institutional allocation also contains private information about first-day IPO returns not reflected in pre-market demand and other public information. Our evidence supports book-building theories of IPO underpricing, but suggests that institutional allocation in underpriced issues is in excess of that explained by book-building alone.

Keywords: IPOs; Allocations; Underpricing; Book-building

JEL Classification: G14, G18, G24, G32

Suggested Citation

Aggarwal, Reena and Prabhala, Nagpurnanand and Puri, Manju, Institutional Allocation in Initial Public Offerings: Empirical Evidence. Journal of Finance, Vol. 57, pp. 1421-1442, 2002. Available at SSRN: https://ssrn.com/abstract=292106

Reena Aggarwal (Contact Author)

Georgetown University - Robert Emmett McDonough School of Business ( email )

3700 O Street, NW
Washington, DC 20057
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202-687-3784 (Phone)
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HOME PAGE: http://explore.georgetown.edu/people/aggarwal/

Nagpurnanand Prabhala

The Johns Hopkins Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States
+1 410 234 4532 (Phone)

Manju Puri

Duke University - Fuqua School of Business ( email )

100 Fuqua Drive
Box 90120
Durham, NC 27708-0120
United States
919-660-7657 (Phone)

NBER

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

FDIC ( email )

550 17th Street NW
Washington, DC 20429
United States

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