Institutional Allocation In Initial Public Offerings: Empirical Evidence
NBER Working Paper No. 9070
We analyze institutional allocation in initial public offerings (IPOs) using a new dataset of US 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 pre-market demand, consistent with book-building theories. However, institutional allocation also contains private information about first-day IPO returns not reflected in pre-market 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.
Published: Aggarwal, R., N.R. Prabhala, and Manju Puri. “Institutional allocation in initial public offerings: Empirical evidence." Journal of Finance 57, 3 (2002): 1421-1442.