FIN-01-002

IPO Allocations: Discriminatory or Discretionary?

August 29, 2001

Alexander Ljungqvist, and William J. Wilhelm, Jr.

ABSTRACT

We estimate the structural links between IPO allocations, pre-market information production, and initial underpricing returns, within the context of theories of bookbuilding. 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.


Subject: Corporate Finance/I-Banking; Venture Capital Banking International Finance
Classification: Empirical

Alexander Ljungqvist
Institution: Stern School of Business, New York University
Email: aljungqv@stern.nyu.edu
Phone: (212) 998-0304
Home Page: http://www.stern.nyu.edu/~aljungqv/

William J. Wilhelm, Jr.
Institution: Carroll School of Management, Boston College
Email: william.wilhelm@bc.edu
Phone: (617) 552-3990
Home Page: http://www2.bc.edu/~wilhelmw/

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