IPO Allocation Research Articles

Sovereign wealth funds as anchor investors in IPOs: Evidence from India

Prior literature on SWFs exclusively focuses on SWFs' secondary market investments due to the lack of publicly available IPO allocation data. For the first time, this study examines SWFs' primary market investments using a unique dataset of IPOs from India, a country which has a transparent and flourishing IPO market that has attracted large sums of money from SWFs in recent years. Specifically, this study investigates the investment strategies of SWFs as anchor investors in Indian IPOs and their impact on IPO performance. We find that SWFs target IPOs that are larger, attract high pre-market demand, involve lower dilution of owners' stake, and are issued by large and profitable but financially-constrained firms. We also find that anchoring by SWFs has a positive impact on IPO performance. In the short term, SWF-anchored IPOs outperform other anchored IPOs with respect to initial returns, IPO demand and extent of price revisions. In the long run, the buy-and-hold abnormal returns of SWF-anchored IPOs significantly exceed that of other anchored IPOs as well as the market. SWF-anchoring significantly improves issuing firms' post-IPO operating performance too. Overall, our findings support the hypothesis that SWFs may be superior stock-pickers and valuable monitors, leading to better short-term and long-term performance of their primary market targets.

Financial Conglomeration, IPO Underwriting, and Allocation in Japan

We examine whether financial conglomeration enhances efficiency of capital allocation or conflicts of interest, focusing on pricing and allocation of IPO stocks in Japan. Regarding underwriting of IPO stocks, our results are consistent with the bank certification hypothesis. As for IPO allocation, the main bank underwriters allocate little to mutual funds, but when they do, they allocate the more underpriced IPOs to unaffiliated mutual funds. We also find some locally consistent evidence supporting the nepotism hypothesis in aftermarket returns of IPO shares. Bank-involved allocation to mutual funds is, however, unrelated to risk-adjusted return (i.e., real quality) and to bank loan reduction in the aftermarket. Overall, the main banks and underwriters do not co-work to allocate new shares in a way that further certifies IPO quality, prompting institutional investors to hold longer in the aftermarket. This is in sharp contrast to U.S. IPO share allocation practice.

Underpricing, Faktor Robust Ipo Pada Bursa Efek Indonesia

This study proves that underpricing is a robust factor on the Indonesia Stock Exchange. This research examines the pricing of IPO, the allocation of shares to groups of institutional investors, the underwriter reputation toward underpricing, price stabilization and excess returns in three regression models and some sub models. Regression results provide evidence that the IPO pricing and allocation of shares to groups of institutional investors affect the underpricing. This evidence supports book building models that developed by Benveniste and Spindt (1989). This study provides evidence that underpricing has a positive effect on price stabilization. Underpricing is also a positive effect on excess returns. Expected proceeds are strong support factor explains underpricing as a central factor. Age and expected proceeds are the support factors, together with underpricing explain price stabilization. Partial price adjustement is support factor together with underpricing explain excess returns.

SEC approves amendment to FINRA IPO allocation rule 5131, easing compliance for fund investors

Purpose – The purpose of the paper is to describe the recent amendments to FINRA's IPO Allocation Rule that were approved by the US Securities and Exchange Commission. Design/methodology/approach – The paper provides a description of the IPO Allocation Rule and its operation, followed by a description of the IPO Allocation Rule amendments recently amended. Findings – On November 27, 2013, the Securities and Exchange Commission approved a change to FINRA's IPO allocation rule 5131 (the “amendment”). The amendment allows a fund of funds or other collective investment account that is investing in an IPO to rely on a written representation from an unaffiliated private fund investor that does not look through to its beneficial owners, provided that such unaffiliated private fund is managed by an investment adviser, has assets greater than $50 million, and meets certain other indicia of independence that are described. Originality/value – The paper provides practical guidance from experienced regulatory lawyers regarding an amendment to an important rule governing IPO sales and allocation practices.

Management of the IPO performance in Thailand

This research aims to explore the relationships between six major IPO elements in Thailand: underwriter reputation, ownership concentration, book-building, IPO allocation, the length of the lock up period, and investor interest and underpricing. The sample comprises 153 IPOs listed between 2001 and 2011. Cross-sectional analysis reveals that IPO allocation appears to be the strongest factor with a negative relation to underpricing. The length of the lock up period, issue size, industry, and hot issue market show significant and positive relationships with underpricing. Underwriter reputation is not associated with underpricing as the choice of underwriter is restricted by the Thai regulator's requirements. Book-building does not explain underpricing. Institutional investors play very limited roles in Thai IPOs. A small change in ownership concentration does not affect underpricing. Nevertheless, a longer lock up period can yield a higher initial return. Such a provision can restrain insider dealing.

The Research on China IPO Mechanism Existence Question and Countermeasure

As a major institutional reform, China IPO market reform in the obtained enormous result while also put in a few problems. First, contradictions between the stock market pricing and the issue of audit. Second, the sponsor closely with the interests of the issuer to issue overvalued. Third, the IPO allocation system is not reasonable inquiry agencies compete to improve the offer of new shares. Reform and perfect the system of IPO, through the system arrangement of the system to achieve. Through accelerate commercialize reform pace, gradually the practice registration system to create the conditions for the future. We should strengthen the issue of market supervision, increase irregularities punishment. The government should further improve the current IPO way of inquiry. Key words: The IPO system; Market-oriented reforms; Problem; Countermeasures

FINRA IPO Allocation Rule; investment funds must now consider compliance

Purpose – The purpose of this paper is to describe the Financial Industry Regulatory Authority's new rule for IPO allocation and the requirements for compliance with the rule.

Is IPO Underpricing Related to Litigation Risk? Evidence Based on the Private Securities Litigation Reform Act of 1995

The litigation risk hypothesis of IPO underpricing posits that issuers underprice IPOs in an effort to avoid costly litigation and that underpricing should be greater for issuers with ex-ante higher levels of litigation risk. This paper reexamines this hypothesis for IPO samples in the different legal and economic environments before and after 1995, the year a law designed to reduce the litigation risk - the Private Securities Litigation Reform Act - was passed. When litigation risk is reduced in three years after 1995, we find firms' litigation risk plays a less significant role in IPO pricing strategy, and underpricing does deter traditional IPO cases more compared to that effect in the pre-1995 period. In the period after that, however, there is another structural change in which firms do again use IPO underpricing as insurance against IPO lawsuits, but more underpricing may actually have led to greater litigation relating to IPO allocation irregularities. We conclude that the evidence of the LRH is very sensitive to the legal and economic environment. Issuers probably have other ways of handling litigation risk in IPOs, more so today than before, rendering a broad and blunt instrument such as underpricing less necessary.

Market conditions and the optimal IPO allocation mechanism in China

This paper investigates the impact of market conditions of market return and volatility on choosing an IPO mechanism, using data of 942 IPOs on either Shanghai or Shenzhen stock exchanges of China from 1994 to 2003. We find, on average, the issuers are more likely to have their IPOs offering and listing during times of high market return and low market volatility. The fixed price procedure of the secondary market proportional offering is optimal in minimising the underpricing and cross-sectional variation of the first day returns. The bookbuilding procedure is optimal in counteracting adverse conditions created by low market profitability, high market volatility and uncertainty induced by the time ‘gap’ from offering to listing. By comparing the advantages between the secondary market proportional offering and bookbuilding procedures, the latter is preferred.

Extreme Underpricing: Determinants of Chinese Ipo Initial Returns

The average underpricing of Chinese IPOs is 267 percent, the highest of any major world market. Using a sample of 1,124 IPOs listed on the Shanghai and Shenzhen Stock Exchanges between 1991 and 2000, we examine empirically the determinants of this extreme level of underpricing. We find it is caused partly by very high investment risks, of the type documented in many other markets, but mostly results from uniquely Chinese regulatory risks and costs. The government regulator sets a cap on pricing IPO shares and stipulates IPO allocation quotas to control the supply of IPO shares. There is also a very long time gap (34 day median, 305 days average) between going public and the actual listing of shares for trading, causing high lockup risk. Investors in China's primary market also discount IPO shares for extreme tunneling and grabbing risks, since these high initial returns benefit governmental political and financial interests and maximize the private benefits of key social elites.

A review of IPO selling methods: Is there a clear winner?

After the hot IPO market of 1999/2000, numerous U.S. underwriters have been sued in connection with unfair IPO allocation schemes. In these lawsuits, plaintiffs contend that the underwriters engaged in illegal tactics by soliciting and receiving kickbacks in exchange for allocations of portions of a company’s IPO, required tie-in purchases creating an artificial demand for the stock, and artificially inflated the price of the stock through “laddering” (requiring purchases of additional stock in the aftermarket at escalating prices). The proliferation of these laddering schemes has inspired several government agencies and regulatory bodies to seek alternatives for a fairer way to sell IPO shares to the public. While auctions such as that used by Google alleviate issues related to unfair share allocation, they are associated with other problems which make them unattractive for many issuers. Our study discusses the advantages and disadvantages of the existing selling methods. While there is no clear-cut answer as to what constitutes the bestselling method, our study should provide corporate managers with the necessary insights that are needed to choose the method that best meets their objectives. In addition, our study aims to open the door for further academic discussion that is required to address a number of questions that to date remain unanswered in this area.

Spinning in a Hot IPO: A Matter of Business Ethics

Spinning is a story that has been around for a while, although there has been considerably more interest in the practice of spinning following recent revelations in the financial press that well-known investment banking firms, such as Credit Suisse First Boston and Salomon Smith Barney, engaged in questionable spinning activity in the late 1990's. One very high profile example, which is the subject of ongoing Congressional and regulatory scrutiny, concerns the spinning practices of Salomon Smith Barney during the hot IPO market of the late 1990s. The WALL STREET JOURNAL has recently reported that in the late 1990s Salomon allocated shares of various hot IPO's in which it served as lead underwriter to the personal trading account of Bernard Ebbers, who was then serving as CEO of WorldCom. This Article analyzes the responsibility and accountability of the underwriter (Salomon) and the executive (Mr. Ebbers) for their involvement in this reported spinning activity. The Article proceeds along two distinct but related lines of inquiry. The first, which has tended to dominate public debate to date, relates to the culpability of those investment banking firms who made the hot IPO allocations. The second, and in many ways more interesting dimension to this story, is the analysis of the culpability of the corporate executive who received the hot IPO allocation. Although the principal focus of my Article is the conduct of the corporate executive, an analysis of the underwriter's potential liability for its spinning activity provides the framework that is necessary to understand the responsibility of the corporate CEO who in turn accepts the hot IPO allocation from the underwriter. The story of spinning offers a fascinating study of the excesses of managerial conduct that grew out of the bull market of the 1990's. In the end, I conclude that the lessons to be learned from the story of spinning serve as a poignant and powerful reminder of the important and influential role that the law of fiduciary duty continues to play in shaping and monitoring standard of fair and ethical conduct that investors can reasonably expect of modern corporate managers. Just as importantly, by framing the doctrine of corporate opportunity to include the CEO's allocation of hot IPO shares from the company's investment banker, the law of fiduciary duty serves the important public policy goal of holding these CEOs accountable for the responsible exercise of power and influence that inevitably comes with the position of CEO of a public company in today's business environment.