Affiliated Mutual Funds and the Allocation of Initial Public Offerings
47 Pages Posted: 24 Apr 2005
Date Written: October 3, 2006
We examine how investment banks use initial public offerings (IPOs) in relation to their affiliated mutual funds. The dumping ground hypothesis predicts that the lead underwriter allocates cold IPOs to its affiliated funds so that more deals can be completed when demand for these IPOs is weak. Affiliated funds may also receive more cold IPOs because the lead underwriter uses allocations of hot IPOs to unaffiliated funds to gain trading commission business. The nepotism hypothesis predicts that the lead underwriter allocates hot IPOs to its affiliated funds to boost their performance and thus attract more money. We find little evidence supporting the dumping ground hypothesis, although there is some evidence supporting the nepotism hypothesis, especially during the internet bubble period of 1999-2000.
Keywords: Initial public offerings, mutual funds, IPO allocations
JEL Classification: G24
Suggested Citation: Suggested Citation