Small Investor Demand and Allocation in Commercial Bank Managed Ipos

34 Pages Posted: 19 Mar 2006

See all articles by Manju Puri

Manju Puri

Duke University - Fuqua School of Business; NBER; FDIC

Jörg Rocholl

ESMT European School of Management and Technology

Date Written: July 24, 2006

Abstract

There is a burgeoning literature on IPO allocations to institutions with retail clientele typically being treated as a monolithic entity. However, there is potential for differential treatment of different groups of retail investors because of the underlying relationship with the underwriter. We use a unique proprietary dataset from Germany to analyze how commercial banks treat different groups of retail investors in their underwriting of new equity issues. Do banks take advantage of retail investors to dump lemons or do their retail investors benefit from getting higher allocation of underpriced issues? We provide evidence that lead underwriters' retail customers demand more of the highly underpriced issues and end up with a higher allocation of underpriced issues. We additionally provide evidence on the underlying incentives of the bank to treat their retail clientele well by examining cross-selling potential from other services of the bank. In particular, we document an increase in both new brokerage accounts and retail consumer loans which are related to increased IPO underwriting, especially underwriting of underpriced IPOs by the commercial bank. Our results support the notion that the underlying relationship with the retail clientele and the potential to offer other services can not only result in differential or favored retail treatment but can lead to incentives for the bank to underprice IPOs to attract new retail customers. This suggests a number of new research questions relevant in many regimes including the current US regulatory setting where both commercial banks and investment banks underwrite.

Suggested Citation

Puri, Manju and Rocholl, Joerg, Small Investor Demand and Allocation in Commercial Bank Managed Ipos (July 24, 2006). EFA 2006 Zurich Meetings Paper. Available at SSRN: https://ssrn.com/abstract=891638 or http://dx.doi.org/10.2139/ssrn.891638

Manju Puri (Contact Author)

Duke University - Fuqua School of Business ( email )

100 Fuqua Drive
Box 90120
Durham, NC 27708-0120
United States
919-660-7657 (Phone)

NBER

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

FDIC ( email )

550 17th Street NW
Washington, DC 20429
United States

Joerg Rocholl

ESMT European School of Management and Technology ( email )

Schlossplatz 1
Berlin
Germany

HOME PAGE: http://www.esmt.org/en/159244

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