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Institutional Allocation in Initial Public Offerings: Empirical Evidence
Author(s) -
Aggarwal Reena,
Prabhala Nagpurnanand R.,
Puri Manju
Publication year - 2002
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/1540-6261.00465
Subject(s) - initial public offering , set (abstract data type) , business , institutional investor , empirical evidence , resource allocation , accounting , economics , public economics , monetary economics , finance , market economy , computer science , corporate governance , philosophy , epistemology , programming language
We analyze institutional allocation in initial public offerings (IPOs) using a new data set of U.S. offerings between 1997 and 1998. We document a positive relationship between institutional allocation and day one IPO returns. This is partly explained by the practice of giving institutions more shares in IPOs with strong premarket demand, consistent with book‐building theories. However, institutional allocation also contains private information about first‐day IPO returns not reflected in premarket demand and other public information. Our evidence supports book‐building theories of IPO underpricing, but suggests that institutional allocation in underpriced issues is in excess of that explained by book‐building alone.