IPOs with and without allocation discretion: Empirical evidence

Bubna, A and Prabhala, N R (2011) IPOs with and without allocation discretion: Empirical evidence. Journal of Financial Intermediation, 20 (4). pp. 530-561. ISSN 1096-0473

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Bookbuilding, the dominant offering mechanism for IPOs, is controversial because of the power it gives underwriters over IPO allocations. Critics argue that allocations could be abused to generate kickbacks for underwriters while proponents hold that allocation power could improve pre-market price discovery. We examine underpricing, bidding, and allocations from two regimes in the Indian IPO market with varying underwriter allocation power. When underwriters control allocations, bookbuilding is associated with lesser underpricing, but the effect quickly dissipates when regulations withdraw allocation powers. Using proprietary datasets of IPO books in both regimes, we find that allocation powers are used quite extensively. Identical bids can receive significantly different allocations, which depend not only on the bid but also on the bidder identity. When allocation powers are withdrawn, we find evidence of bidder exit, new bidder entry, and altered bidding strategies with exit by both favored and unfavored bidders. Our evidence supports bookbuilding theories in which giving underwriters allocation powers assists in pre-market price discovery

Item Type: Article
Subjects: Finance
Date Deposited: 30 Oct 2014 10:17
Last Modified: 12 Jul 2023 20:01
URI: https://eprints.exchange.isb.edu/id/eprint/77

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