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IPO Allocations: Discriminatory or Discretionary?

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  • Ljungqvist, Alexander P
  • Wilhelm Jr, William J

Abstract

We estimate the structural links between IPO allocations, pre-market information production, and initial underpricing returns, within the context of theories of bookbuilding. Using a sample of both US and international IPOs we find evidence of the following: ? IPO allocation policies favour institutional investors, both in the US and worldwide. ? Increasing institutional allocations results in offer prices that deviate more from the indicative price range established prior to bankers’ efforts to gauge demand among institutional investors. ? Constraints on the discretion bankers exercise in the allocation of IPO shares reduce institutional allocations. ? Constraints on allocation discretion result in smaller price revisions. We interpret this as indicative of diminished information production. ? Initial returns, which reflect a significant indirect cost of going public, are directly related to our measure of information production and inversely related to the fraction of shares allocated to institutional investors. Our results indicate that discretionary allocations promote price discovery in the IPO market and reduce issuance costs for firms attempting to go public.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2855.

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Date of creation: Jul 2001
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Handle: RePEc:cpr:ceprdp:2855

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Keywords: bookbuilding; initial public offerings; intermediation; underpricing;

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References

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  1. Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 31(3), pages 129-137.
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  3. Michelle Lowry & G. William Schwert, 2000. "IPO Market Cycles: Bubbles or Sequential Learning?," NBER Working Papers 7935, National Bureau of Economic Research, Inc.
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  7. Alexander Ljungqvist & Tim Jenkinson & William Wilhelm, 2001. "Global Integration in Primary Equity Markets: The Role of U.S. Banks and U.S. Investors," OFRC Working Papers Series 2001fe06, Oxford Financial Research Centre.
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  14. Hanley, Kathleen Weiss & Wilhelm Jr., William J., 1995. "Evidence on the strategic allocation of initial public offerings," Journal of Financial Economics, Elsevier, vol. 37(2), pages 239-257, February.
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