Institutional Allocation in Initial Public Offerings: Empirical Evidence

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