IPO Allocations: Discriminatory or Discretionary?

Using a sample of both U.S. and international IPOs we find evidence of the following: IPO allocation policies favor institutional investors both in the U.S. and worldwide. Constraints on the discretion bankers exercise in the allocation of IPO shares reduce institutional allocations. Constraints on allocation discretion result in offer prices that deviate less from the indicative price range established prior to bankers' efforts to gauge demand among institutional investors. We interpret this as indicative of diminished information production. Initial returns, which reflect a significant indirect cost of going public, are directly related to this measure of information production and inversely related to the fraction of shares allocated to institutional investors.