Affiliated Mutual Funds and the Allocation of Initial Public Offerings

Posted: 10 Oct 2006

See all articles by Donghang Zhang

Donghang Zhang

University of South Carolina - Darla Moore School of Business

Jay R. Ritter

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

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Abstract

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

Zhang, Donghang and Ritter, Jay R., Affiliated Mutual Funds and the Allocation of Initial Public Offerings. Journal of Financial Economics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=936217

Donghang Zhang (Contact Author)

University of South Carolina - Darla Moore School of Business ( email )

1705 College St
Francis M. Hipp Building
Columbia, SC 29208
United States

Jay R. Ritter

University of Florida - Department of Finance, Insurance and Real Estate ( email )

P.O. Box 117168
Gainesville, FL 32611
United States
(352) 846-2837 (Phone)
(352) 392-0301 (Fax)

HOME PAGE: http://bear.cba.ufl.edu/ritter

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