Do Today's Trades Affect Tomorrow's IPO Allocations?

Nimalendran, Mahendrarajah; Ritter, Jay R.; Zhang, Donghang

doi:10.2139/ssrn.644041

Do Today's Trades Affect Tomorrow's IPO Allocations?

AFA 2005 Philadelphia Meetings, Forthcoming

36 Pages Posted: 5 Jan 2005

See all articles by Mahendrarajah Nimalendran

Mahendrarajah Nimalendran

University of Florida - Department of Finance, Insurance and Real Estate

Jay R. Ritter

University of Florida - Department of Finance, Insurance and Real Estate

Donghang Zhang

University of South Carolina - Darla Moore School of Business

Date Written: February 3, 2006

Abstract

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

Nimalendran, Mahendrarajah and Ritter, Jay R. and Zhang, Donghang, Do Today's Trades Affect Tomorrow's IPO Allocations? (February 3, 2006). AFA 2005 Philadelphia Meetings, Forthcoming, Available at SSRN: https://ssrn.com/abstract=644041 or http://dx.doi.org/10.2139/ssrn.644041