Do Banks Underprice IPOs to Satisfy Early Investors?

Abstract

IPOs increasingly involve early investors who commit to buying shares before the offering is launched. Using a European sample, we examine whether banks underprice strongly-demanded IPOs to satisfy the limit prices of early investors, and whether such investors salvage weakly-demanded IPOs in equilibrium. We find early investors are associated with significantly higher underpricing in IPOs pricing at the top of the filing range, where their limit prices are likely to have been binding. However, we find no evidence they salvage IPOs, reduce withdrawals or gross spreads, or provide informational services. Instead, we find support for agency-based explanations for the underpricing.

Keywords: initial public offering, underpricing, early investors

JEL Classification: G24, G30