Working Paper: NBER ID: w9070
Authors: Reena Aggarwal; Nagpurnanand R. Prabhala; Manju Puri
Abstract: We analyze institutional allocation in initial public offerings (IPOs) using a new dataset of US offerings between 1997 and 1998. We document a positive relationship between institutional allocation and day one IPO returns. This is partly explained by the practice of giving institutions more shares in IPOs with strong pre-market demand, consistent with book-building theories. However, institutional allocation also contains private information about first-day IPO returns not reflected in pre-market demand and other public information. Our evidence supports book-building theories of IPO underpricing, but suggests that institutional allocation in underpriced issues is in excess of that explained by book-building alone.
Keywords: IPO; Institutional Allocation; Underpricing; Bookbuilding; Market Demand
JEL Codes: G2; G3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| institutional allocation (G23) | day one IPO returns (G24) |
| institutional allocation (G23) | private information about first-day IPO returns (G24) |
| institutional allocation (G23) | profits from IPO investments (G24) |
| day one IPO returns (G24) | institutional allocation (G23) |