FIN-01-017

Allocations, Adverse Selection and Cascades in IPOs: Evidence from Israel

October 2001

Yakov Amihud, Shmuel Hauser and Amir Kirsh

ABSTRACT

This paper examines three theories of IPO underpricing, using data from Israel where the allocations to subscribers are equally prorated and publicly known. Rock’s (1986) theory of adverse selection is supported: subscribers receive greater allocations in overpriced IPOs. And, while the average IPO excess return is 12%, the simulated allocation-weighted return to uninformed investors is slightly negative. Welch’s (1992) theory of information cascades is supported by the pattern of allocations: demand is either extremely high or there is undersubscription, with very few cases in between. Also supported is the proposition that underpricing is a means to increase ownership dispersion.

Yakov Amihud
Institution: Stern School of Business, New York University, 44th West 4th Street, New York, NY 10012
Email: yamihud@stern.nyu.edu
Telephone: (212) 998-0720
Fax: (212) 995-4220
Homepage: http://www.stern.nyu.edu/~yamihud/

Shmuel Hauser
Institution: School of Management, Ben-Gurion University


Amir Kirsh
Institution: Faculty of Management, Tel Aviv University

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