Allocation Of Initial Public Offerings Research Articles

Hedge Funds and Their Prime Brokers: Favorable IPO Allocations

Do hedge funds receive special treatment from their prime brokers in initial public offering (IPO) allocations? Using a comprehensive dataset, the authors examine investment banks’ allocations of IPOs to their hedge fund clients. They find that investment banks/prime brokers that have business relationships with hedge funds tend to allocate more IPOs to those hedge funds when the banks are the lead underwriters. Moreover, the size of allocation to hedge funds is larger when IPOs are underpriced, and allocations are larger during bear equity markets. The authors document that younger funds or funds with recent poor performance tend to receive relatively larger allocations of underpriced IPOs. The size of these allocations is determined by the strength of the funds’ relationships with their prime brokers, rather than by the level of their managers’ skill. This is supported by the finding that, even after receiving relatively large allocations of underpriced IPOs, these funds fail to generate significant alphas. <b>TOPICS:</b>Security analysis and valuation, exchanges/markets/clearinghouses, real assets/alternative investments/private equity, performance measurement <b>Key Findings</b> ▪ Investment banks that act as prime brokers for hedge funds and are lead underwriters of IPOs tend to allocate larger amounts of underpriced IPOs to their hedge fund clients. ▪ Investment banks tend to allocate a larger amount to their clients during bear equity markets, with younger funds and those with poor recent performance receiving relatively larger allocations. ▪ Investment banks reward those clients that have stronger relationship with them. The skills of hedge fund managers do not drive the favorable allocations.

When do Investment Banks use IPO Price Support?

Practitioners, regulators, and the financial media argue that underwriters tie Initial Public Offering (IPO) allocations to investor post-listing buying of the issuer shares in a process labelled price support. Arguably, this excess demand boosts post-listing returns which underwriters trade quid-pro-quo with investor stock-trading-commission payments. In this paper, I investigate unique data from the Oslo Stock Exchange (OSE) including investor stock-trading-commissions, IPO allocations, and post-listing trading. I document that investors who provide high returns to underwriters before IPOs benefit from price support through increased returns in IPOs. I conclude that price support is used when investors share boosted returns with underwriters.

The Limits of a Centralized Bureaucracy: Evidence from the Stock Market in China

Recent research shows that political centralization can reduce elite capture and improve governance outcomes. Despite these benefits, we demonstrate that there is a limit for an independent-minded, centralized bureaucracy to eliminate the influence of private and local interests. We study a highly centralized approval-based system of initial public offerings (IPOs) in the Chinese stock market. Such a system is designed to avoid the influence of private, local interests and select well-performing firms for IPO based solely on efficiency criteria. However, we find that seemingly powerless provincial politicians can still strongly influence the allocation of IPOs in favor of loyal mayors by cooperating strategically with central bureaucrats. Hence, firms in loyal subordinates’ cities are more likely to receive IPO approval. These findings contribute to our understanding of the limits of centralized bureaucracy as a tool to improve governance outcomes and prevent the influence of local and private interests.

Initial Public Offering Price Support and Ownership Structures

Shares sold through Initial Public Offerings (IPOs) are often underpriced and therefore very popular investment objects. Fjesme (2016) documents that the allocating investment bank requires certain larger investors in popular IPOs to also purchase more shares after the stock exchange listing. This additional buying supports prices and attracts more attention to the companies in the short term. Wilhelm (1999) explains how non-professional investors are likely to misunderstand this price support as positive information and thereby increase their investment. Obtaining data to investigate the implications of price support on investor holdings has proven difficult in the past. In this paper, I investigate actual IPO allocations combined with trading after the listing on the Oslo Stock Exchange (OSE). I document that increased price support generates a large influx of domestic and retail ownership as opposed to foreign institutional ownership. I conclude that price support reduces international institutional ownership on the OSE.

Affiliated Mutual Funds and Allocation of Initial Public Offerings in Korea: Abnormal Returns in IPOs Holding Periods

Affiliated Mutual Funds and Allocation of Initial Public Offerings in Korea: Abnormal Returns in IPOs Holding Periods

Is It Who You Know or What You Know? Evidence from IPO Allocations and Mutual Fund Performance

Mutual fund managers with degrees from elite universities tend to outperform their counterparts from less elite universities. We show that the better performance of elite graduates is generated from their better connections with underwriters that facilitate allocations to underpriced initial public offerings (IPOs). Indeed, we find that the funds outperformonlyin months when they are connected to underwriters issuing IPOs. A strategy of buying mutual funds in months when they are connected to underwriters scheduled to issue IPOs generates significant abnormal returns, as high as 4.08% per annum in hot markets.

Quid Pro Quo? What Factors Influence IPO Allocations to Investors?

ABSTRACTUsing data from all of the leading international investment banks on 220 initial public offerings (IPOs) raising $160 billion between January 2010 and May 2015, we test the determinants of IPO allocations. We compare investors’ IPO allocations with proxies for their information production during bookbuilding and the broking (and other) revenues they generate for bookrunners. We find evidence consistent with information revelation theories. We also find strong support for the existence of a quid pro quo whereby broking revenues are a significant determinant of investors’ IPO allocations and profits. The quid pro quo remains when we control for unobserved investor characteristics and investor‐bank relationships.

When do investment banks use IPO price support?

AbstractPractitioners, regulators, and the financial media argue that underwriters tie initial public offering (IPO) allocations to investor post‐listing buying of the issuer shares in a process labelled price support. Arguably, this excess demand boosts post‐listing returns which underwriters trade quid pro quo with investor stock‐trading commission payments. In this paper, I investigate unique data from the Oslo Stock Exchange (OSE) including investor stock‐trading commissions, IPO allocations, and post‐listing trading. I document that investors who provide high returns to underwriters before IPOs benefit from price support through increased returns in IPOs. I conclude that price support is used when investors share boosted returns with underwriters.

Initial public offering price supportand ownership structures

Shares sold through Initial Public Offerings (IPOs) are often underpriced and therefore very popular investment objects. Fjesme (2016) documents that the allocating investment bank requires certain larger investors in popular IPOs to also purchase more shares after the stock exchange listing. This additional buying supports prices and attracts more attention to the companies in the short term. Wilhelm (1999) explains how non-professional investors are likely to misunderstand this price support as positive information and thereby increase their investment. Obtaining data to investigate the implications of price support on investor holdings has proven difficult in the past. In this paper, I investigate actual IPO allocations combined with trading after the listing on the Oslo Stock Exchange (OSE). I document that increased price support generates a large influx of domestic and retail ownership as opposed to foreign institutional ownership. I conclude that price support reduces international institutional ownership on the OSE.

IPO Allocations and New Mutual Funds

Using an event time approach, we find that mutual funds outperform during the 6-month period after inception. This result is not driven by incubation bias; rather new fund outperformance concentrates among funds with access to initial public offerings (IPOs), especially to more underpriced IPOs. Favoritism among fund families, partly explains access to IPOs. Finally, funds with access to IPOs that signal preferential access to future IPOs display greater investment flow, even after controlling for performance. Overall, the evidence suggests that fund families strategically exploit access to IPO allocations to open new mutual funds that demonstrate strong investment performance and attract greater investment flow.

Initial Public Offering Allocations, Price Support, and Secondary Investors

Tying initial public offering (IPO) allocations to after-listing purchases of other IPO shares as a form of price support has generated much theoretical interest and media attention. Price support is price manipulation and can reduce secondary investor return. In the past, obtaining data to investigate price support has proven to be difficult. I document that price support is harming secondary investor return using new data from the Oslo Stock Exchange. I also show that investors who engage in price support are allocated more future oversubscribed allocations, whereas harmed secondary investors significantly reduce their future participation in the secondary market.

The Role of Cornerstone and Strategic Investors in IPO Survival

We examine the impact of the allocation of initial public offerings (IPOs) to specific investor groups on post-IPO performance in terms of how long an IPO remains listed. We focus on the Hong Kong IPO market, where detailed data on share allocation are publicly available. In this context, we assess the roles of so-called cornerstone and strategic investors in IPOs, who agree with the issuers a specified investment in the IPO and enter into lock-up periods. We find that the presence, number and lock-up periods of strategic investors, and the prevalence of foreign strategic investors, significantly increase IPO survival (delay the time to delisting). By contrast, the impact of cornerstone investors is at best marginally significant. Our results are robust to using different measures of survival.

IPO Pricing Mechanisms in the Presence of When-Issued Markets

In some countries, it is common that initial public offerings (IPOs) are preceded by forward ("when-issued") trading of the shares; in the US, such trading is prohibited. We analyze the effect of when-issued trading on the pricing and allocation of IPO shares. We demonstrate that the optimal selling mechanism in the presence of when-issued trading differs qualitatively from the optimal mechanism if such trading is prohibited. Furthermore we show that trading rules in the when-issued market can be designed so that allowing when-issued trading results in an increase in expected issue proceeds.

IPO Pricing Mechanisms in the Presence of When-Issued Markets

In some countries, it is common that initial public offerings (IPOs) are preceded by forward (when-issued'') trading of the shares; in the U.S., such trading is prohibited. We analyze the effect of when-issued trading on the pricing and allocation of IPO shares. We demonstrate that the optimal selling mechanism in the presence of when-issued trading differs qualitatively from the optimal mechanism if such trading is prohibited. Furthermore we show that trading rules in the when-issued market can be designed so that allowing when-issued trading results in an increase in expected issue proceeds.

Purchasing IPOs with Commissions

AbstractWe find direct evidence that institutions increase round-trip stock trades, increase average commissions per share, and pay unusually high commissions on some trades in order to send abnormally high commissions to the lead underwriters of profitable initial public offerings (IPOs). These excess commission payments are a particularly effective way for transient investors to receive lucrative IPO allocations. Our results suggest that the underwriter’s concern for their long-term client relationships limits the payment-for-IPO practice. We estimate that abnormal commission payments are large for the most profitable issues, and that an additional $1 excess commission payment to the lead underwriter results in $2.21 in investor profits from allocated shares.

Laddering in Initial Public Offering Allocations

Tying Initial Public Offering (IPO) allocations to after-listing purchases of other IPO shares, as a form of price support, has generated much theoretical interest and media attention. Price support is price manipulation and can reduce secondary investor return. Obtaining data to investigate price support has in the past proven to be difficult. We document that price support is harming secondary investors using new data from the Oslo Stock Exchange (OSE). We also show that investors who engage in price support are allocated more future oversubscribed allocations and that secondary investors stay away from the market in the future when they lose money.

The Role of Institutional Investors in Initial Public Offerings

In this article, we use a large sample of transaction-level institutional trading data to analyze the role of institutional investors in initial public offerings (IPOs). The theoretical literature on IPOs has long argued that institutional investors possess private information about IPOs and that underpricing is a mechanism for compensating them to reveal this private information. We study whether institutions indeed have private information about IPOs, retain their information advantage in post-IPO trading, and are able to realize significant profits from their participation in IPOs. We also study institutional IPO allocations and allocation sales to analyze whether institutions play an important role in supporting IPOs in the aftermarket and are rewarded by underwriters for playing such a role. We find that institutions sell 70.2% of their IPO allocations in the first year, fully realize the “money left on the table,” and do not dissipate these profits in post-IPO trading. Further, institutions hold allocations in IPOs with weaker post-issue demand for a longer period, and they are rewarded for this by underwriters with more IPO allocations. Finally, institutional trading has predictive power for long-run IPO performance, especially in IPOs in which they received allocations; however, this predictive power decays over time. Overall, our results suggest that institutional investors possess significant private information about IPOs, play an important supportive role in the IPO aftermarket, and receive considerable compensation for their participation in IPOs.

Winner’s Curse in Initial Public Offering Subscriptions with Investors’ Withdrawal Options

AbstractContrary to fixed‐priced initial public offering (IPO) subscribers in many other countries, IPO subscribers in Taiwan own the option to withdraw from their IPO allocations after learning the allocation rate (ALLOC). Investors’ option to withdraw reduces the information asymmetry between informed investors and uninformed investors but increases the firm‐commitment underwriting risk. We show that under investors’ option to withdraw, uninformed investors can improve their performance by learning from the ALLOC and/or the withdrawal rate. Consequently, firm‐commitment underwriters will absorb more overpriced shares. Unless underwriters are compensated directly by issuers, IPOs should be more underpriced to compensate underwriting activities under investors’ option to withdraw.

IPO Pricing and Allocation: A Survey of the Views of Institutional Investors

Despite the central importance of investors to all initial public offering (IPO) theories, relatively little is known about their role in practice. This article is based on a survey of how institutional investors assess IPOs, what information they provide to the investment banking syndicate, and the factors they believe influence allocations. We find that investor characteristics, in particular brokerage relationships with the bookrunner, are perceived to be the most important factors influencing allocations, which supports the view that IPO allocations are part of implicit quid pro quo deals with investment banks. The survey raises doubts as to the extent of information production or revelation.

Affiliated mutual funds and the allocation of initial public offerings

We examine how investment banks use initial public offerings (IPOs) in relation to their affiliated mutual funds. The dumping ground hypothesis predicts that the lead underwriter allocates cold IPOs to its affiliated funds so that more deals can be completed when demand for these IPOs is weak. Affiliated funds could also receive more cold IPOs because the lead underwriter uses allocations of hot IPOs to unaffiliated funds to gain trading commission business. The nepotism hypothesis predicts that the lead underwriter allocates hot IPOs to its affiliated funds to boost their performance and thus attract more money. We find little evidence supporting the dumping ground hypothesis, although some evidence supports the nepotism hypothesis, especially during the internet bubble period of 1999–2000.