Who Receives IPO Allocations? An Analysis of 'Regular' Investors

Abstract

We analyze 1.56 million account allocations in a sample of 265 initial public offerings (IPOs) to investigate the importance of on-going relationships between investors and underwriters. We find a sizable set of both institutional and retail investors who receive frequent allocations in IPOs. These regular investors receive greater monetary first-day gains, but lower average returns than other investors. This suggests that underwriters require regular investors to participate in weak offerings, but compensate them with continued access to underpriced shares. We develop measures of the reliance on regular investors in IPOs and investigate its determinants and consequences. Inconsistent with the predictions of bookbuilding models, we find no clear relationship between these measures and underpricing of IPOs.