Do Today's Trades Affect Tomorrow's IPO Allocations?
36 Pages Posted: 5 Jan 2005
Date Written: February 3, 2006
Underwriters using bookbuilding have discretionary power for allocating shares of initial public offerings (IPOs). Commissions paid to underwriters by investors are one of the determinants of IPO allocations. We test the hypothesis that investors trade liquid stocks in order to affect their IPO allocations. Consistent with this hypothesis, we find that money left on the table by IPOs affects the trading volume of the 50 most liquid stocks close to the offer date. For an IPO that leaves $1 billion on the table, in the six days ending on the day that trading commences there is abnormal volume in the 50 most liquid stocks of 2.7 to 4.1%, although only during the internet bubble period is this statistically significant.
Keywords: IPOs, brokerage commissions
JEL Classification: G24
Suggested Citation: Suggested Citation