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Institutional Allocation in Initial Public Offerings: Empirical Evidence

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  • Aggrawal, Reena

    (Georgetown U)

  • Prabhala, Nagpurnanand

    (U of Maryland)

  • Puri, Manju

    (Stanford U)

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.

Suggested Citation

  • Aggrawal, Reena & Prabhala, Nagpurnanand & Puri, Manju, 2002. "Institutional Allocation in Initial Public Offerings: Empirical Evidence," Research Papers 1747, Stanford University, Graduate School of Business.
  • Handle: RePEc:ecl:stabus:1747
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    References listed on IDEAS

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    1. Beatty, Randolph P. & Ritter, Jay R., 1986. "Investment banking, reputation, and the underpricing of initial public offerings," Journal of Financial Economics, Elsevier, vol. 15(1-2), pages 213-232.
    2. Hsuan-Chi Chen & Jay R. Ritter, 2000. "The Seven Percent Solution," Journal of Finance, American Finance Association, vol. 55(3), pages 1105-1131, June.
    3. Katrina Ellis & Roni Michaely & Maureen O'Hara, 2000. "When the Underwriter Is the Market Maker: An Examination of Trading in the IPO Aftermarket," Journal of Finance, American Finance Association, vol. 55(3), pages 1039-1074, June.
    4. Carter, Richard B & Manaster, Steven, 1990. " Initial Public Offerings and Underwriter Reputation," Journal of Finance, American Finance Association, vol. 45(4), pages 1045-1067, September.
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