The Role of Institutional Investors in Initial Public Offerings

Review of Financial Studies, Vol. 23, pp. 4496-4540, 2010

WFA 2007 Big Sky Meetings Paper

EFA 2006 Zurich Meetings Paper

58 Pages Posted: 17 Jun 2006 Last revised: 23 Nov 2010

Thomas J. Chemmanur

Boston College - Carroll School of Management

Gang Hu

Hong Kong Polytechnic University - School of Accounting and Finance

Jiekun Huang

University of Illinois at Urbana-Champaign - Department of Finance

Date Written: November 21, 2010

Abstract

In this paper, we use a large sample of transaction-level institutional trading data to analyze the role of institutional investors in initial public offerings (IPOs). The theoretical literature on IPOs has long argued that institutional investors possess private information about IPOs and that underpricing is a mechanism for compensating them to reveal this private information. We study whether institutions indeed have private information about IPOs, retain their information advantage in post-IPO trading, and are able to realize significant profits from their participation in IPOs. We also study institutional IPO allocations and allocation sales to analyze whether institutions play an important role in supporting IPOs in the aftermarket and are rewarded by underwriters for playing such a role. We find that institutions sell 70.2% of their IPO allocations in the first year, fully realize the “money left on the table,” and do not dissipate these profits in post-IPO trading. Further, institutions hold allocations in IPOs with weaker post-issue demand for a longer period, and they are rewarded for this by underwriters with more IPO allocations. Finally, institutional trading has predictive power for long-run IPO performance, especially in IPOs in which they received allocations; however, this predictive power decays over time. Overall, our results suggest that institutional investors possess significant private information about IPOs, play an important supportive role in the IPO aftermarket, and receive considerable compensation for their participation in IPOs.

Keywords: Initial public offerings, Institutional investors, Trading, IPO allocations, Flipping

JEL Classification: G14, G24

Suggested Citation

Chemmanur, Thomas J. and Hu, Gang and Huang, Jiekun, The Role of Institutional Investors in Initial Public Offerings (November 21, 2010). Review of Financial Studies, Vol. 23, pp. 4496-4540, 2010; WFA 2007 Big Sky Meetings Paper; EFA 2006 Zurich Meetings Paper. Available at SSRN: https://ssrn.com/abstract=959645

Thomas J. Chemmanur

Boston College - Carroll School of Management ( email )

440 Fulton Hall
Boston College
Chestnut Hill, MA 02467-3808
United States
617-552-3980 (Phone)
617-552-0431 (Fax)

Gang Hu (Contact Author)

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

M1038, Li Ka Shing Tower
Hung Hom, Kowloon
Hong Kong
(852) 3400 8455 (Phone)

HOME PAGE: http://www.mypolyuweb.hk/ganghu

Jiekun Huang

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

HOME PAGE: http://www.huangjk.info

Paper statistics

Downloads
752
Rank
25,990
Abstract Views
3,477