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The economic role of institutional investors in auction IPOs

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  • Lu, Yuechan
  • Samdani, Taufique

Abstract

We examine the economic role of institutional investors in auction initial public offerings (IPOs) with and without a discretionary tranche of IPO shares pledged to institutional investors prior to public filing. We find that underpricing in auction IPOs with a discretionary tranche is lower (higher) than underpricing in auction IPOs without a discretionary tranche when institutional demand for IPO shares is high (low). The findings, which hold after controlling for potential endogeneity, reveal a cost-benefit tradeoff in auction IPOs that is sensitive to institutional demand, and explain why auction, albeit commonly used for debt instruments, is rarely used for IPOs.

Suggested Citation

  • Lu, Yuechan & Samdani, Taufique, 2019. "The economic role of institutional investors in auction IPOs," Journal of Corporate Finance, Elsevier, vol. 56(C), pages 267-281.
    • Handle: RePEc:eee:corfin:v:56:y:2019:i:c:p:267-281
    DOI: 10.1016/j.jcorpfin.2019.02.004
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    More about this item

    Keywords

    Auction IPO; Discretionary allocation; IPO underpricing; Institutional investors; Quid pro quo; Winner's curse;
    All these keywords.

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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