DP2855 | IPO Allocations: Discriminatory or Discretionary?

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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 US and international IPOs we find evidence of the following: ? IPO allocation policies favour institutional investors, both in the US and worldwide. ? Increasing institutional allocations results in offer prices that deviate more from the indicative price range established prior to bankers? efforts to gauge demand among institutional investors. ? Constraints on the discretion bankers exercise in the allocation of IPO shares reduce institutional allocations. ? Constraints on allocation discretion result in smaller price revisions. We interpret this as indicative of diminished information production. ? Initial returns, which reflect a significant indirect cost of going public, are directly related to our measure of information production and inversely related to the fraction of shares allocated to institutional investors. Our results indicate that discretionary allocations promote price discovery in the IPO market and reduce issuance costs for firms attempting to go public.