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IPOs with and without allocation discretion: Empirical evidence

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  • Bubna, Amit
  • Prabhala, Nagpurnanand R.

Abstract

Bookbuilding, the dominant offering mechanism for IPOs, is controversial because of the power it gives underwriters over IPO allocations. Critics argue that allocations could be abused to generate kickbacks for underwriters while proponents hold that allocation power could improve pre-market price discovery. We examine underpricing, bidding, and allocations from two regimes in the Indian IPO market with varying underwriter allocation power. When underwriters control allocations, bookbuilding is associated with lesser underpricing, but the effect quickly dissipates when regulations withdraw allocation powers. Using proprietary datasets of IPO books in both regimes, we find that allocation powers are used quite extensively. Identical bids can receive significantly different allocations, which depend not only on the bid but also on the bidder identity. When allocation powers are withdrawn, we find evidence of bidder exit, new bidder entry, and altered bidding strategies with exit by both favored and unfavored bidders. Our evidence supports bookbuilding theories in which giving underwriters allocation powers assists in pre-market price discovery.

Suggested Citation

  • Bubna, Amit & Prabhala, Nagpurnanand R., 2011. "IPOs with and without allocation discretion: Empirical evidence," Journal of Financial Intermediation, Elsevier, vol. 20(4), pages 530-561, October.
  • Handle: RePEc:eee:jfinin:v:20:y:2011:i:4:p:530-561
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    1. repec:eee:finsta:v:30:y:2017:i:c:p:1-15 is not listed on IDEAS
    2. repec:eee:corfin:v:47:y:2017:i:c:p:253-268 is not listed on IDEAS
    3. Wadhwa, Kavita & Nagi Reddy, V. & Goyal, Abhinav & Mohamed, Abdulkadir, 2016. "IPOs and SEOs, real investments, and market timing: Emerging market evidence," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 45(C), pages 21-41.
    4. Mazouz, Khelifa & Mohamed, Abdulkadir & Saadouni, Brahim & Yin, Shuxing, 2017. "Underwriters' allocation with and without discretionary power: Evidence from the Hong Kong IPO market," International Review of Financial Analysis, Elsevier, vol. 49(C), pages 128-137.
    5. Brooks, Raymond M. & Mathew, Prem G. & Yang, J. Jimmy, 2014. "When-issued trading in the Indian IPO market," Journal of Financial Markets, Elsevier, vol. 19(C), pages 170-196.
    6. Seshadev Sahoo, 2015. "Subscription Rate and Volatility," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 14(1), pages 20-58, April.
    7. Clarke, Jonathan & Khurshed, Arif & Pande, Alok & Singh, Ajai K., 2016. "Sentiment traders & IPO initial returns: The Indian evidence," Journal of Corporate Finance, Elsevier, vol. 37(C), pages 24-37.
    8. Khurshed, Arif & Paleari, Stefano & Pande, Alok & Vismara, Silvio, 2014. "Transparent bookbuilding, certification and initial public offerings," Journal of Financial Markets, Elsevier, vol. 19(C), pages 154-169.
    9. Jacob, Joshy & Agarwalla, Sobhesh Kumar, 2012. "Mandatory IPO Grading: Does it Help Pricing Efficiency?," IIMA Working Papers WP2012-12-07, Indian Institute of Management Ahmedabad, Research and Publication Department.
    10. Jagannathan, Ravi & Jirnyi, Andrei & Sherman, Ann Guenther, 2015. "Share auctions of initial public offerings: Global evidence," Journal of Financial Intermediation, Elsevier, vol. 24(3), pages 283-311.

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