Laddering IPO Shares

Abstract

Regulators, investors, and the financial media argue that underwriters tie Initial Public Offering (IPO) allocations to investor post-listing purchases in the issuer shares. Using unique data from the Oslo Stock Exchange (OSE) I investigate if these tie-in agreements are driven by price stabilization (reducing price falls below the offer price) or laddering (inflating prices above the offer price). I find that both stabilizing and laddering investors are rewarded with increased allocations for their service. However, only laddering investors increase allocations in very oversubscribed future issues. Secondary investors also lose from falling returns following laddering. I conclude that underwriters use both price stabilization and laddering across different IPOs. However, the rewards for cooperating investors and the economic consequences for secondary investors are much greater following laddering.

Keywords: IPO allocations, Laddering, Tie-in agreements, Rent seeking, Equity offerings

JEL Classification: G3, G24