Initial Public Offering Allocations, Price Support, and Secondary Investors

Abstract

Tying initial public offering (IPO) allocations to after-listing purchases of other IPO shares as a form of price support has generated much theoretical interest and media attention. Price support is price manipulation and can reduce secondary investor return. In the past, obtaining data to investigate price support has proven to be difficult. I document that price support is harming secondary investor return using new data from the Oslo Stock Exchange. I also show that investors who engage in price support are allocated more future oversubscribed allocations, whereas harmed secondary investors significantly reduce their future participation in the secondary market.

When do investment banks use IPO price support?

“…Price support is the percent of the IPO issue that is purchased by allocated international institutional investors in the first month after the listing. This is the same definition of Price support as Fjesme (). Oversubscribed is a dummy variable that takes the value of one (otherwise zero) for IPOs that are reported as being oversubscribed in the newspapers in the weeks following the listing .…”

“…Signori et al () and Meoli, Signori, and Vismara () explain that underwriters provide traditional services such as due diligence, roadshows, book‐building, and placements in all IPOs, but that fewer than half of the IPOs that require price support actually receive this service. Fjesme () additionally documents that the investors who provide price support temporarily increase their holdings of IPO shares in the aftermarket. These price support investors have no interest in holding these additional shares as witnessed by the slowly offloading of their holdings over the next months after the listing.…”

“…Price support investors are rewarded with future hot IPO allocations for this service. Fjesme () finally shows that international institutional investors are used for price support and that naive non‐allocated investors increase buying in companies with more price support. Vismara, Signori, and Paleari () additionally show how underwriters select peer firms when determining IPO offer prices that intentionally gives higher IPO underpricing.…”

“…The investors on the A list get a higher proportion of applied for shares than investors on the B list and so forth . The average first day return, capital raised, and allocation to institutional investors is 10%, US$89 million, and 79%, respectively; see Fjesme ().…”

“…The final sample consists of 188 IPOs. This is the same sample as used in Fjesme (). When possible, I show the results for all 188 companies as well as for the subsample of the 35 companies with exact data on IPO allocations and post‐listing trading.…”