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Institutional Allocation in Initial Public Offerings: Empirical Evidence

Author

Listed:
  • Reena Aggarwal

    (Georgetown University,)

  • Nagpurnanand R. Prabhala

    (University of Maryland, College Park,)

  • Manju Puri

    (Stanford University and NBER)

Abstract

We analyze institutional allocation in initial public offerings (IPOs) using a new data set of U.S. 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 premarket demand, consistent with book-building theories. However, institutional allocation also contains private information about first-day IPO returns not reflected in premarket 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. Copyright The American Finance Association 2002.

Suggested Citation

  • Reena Aggarwal & Nagpurnanand R. Prabhala & Manju Puri, 2002. "Institutional Allocation in Initial Public Offerings: Empirical Evidence," Journal of Finance, American Finance Association, vol. 57(3), pages 1421-1442, June.
  • Handle: RePEc:bla:jfinan:v:57:y:2002:i:3:p:1421-1442
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