IPO Pricing and Allocation: A Survey of the Views of Institutional Investors

Abstract

Despite the central importance of investors to all IPO theories, relatively little is known about their role in practice. In this paper we survey institutional investors about how they assess IPOs, what information they provide to the investment banking syndicate, and the factors they believe influence allocations. Although the theoretical IPO literature has tended to focus on information revelation, the survey raises doubts as to the extent of incremental information production and whether bookrunners are, in practice, able to infer investors' valuations from their bids. We find that investor characteristics, in particular broking relationships with the bookrunner, are perceived to be the most important factors influencing allocations, which supports the view that IPO allocations are part of implicit quid pro quo deals with investment banks.

Competitive IPOs

“…In practice the bookrunner tends to receive most or all of the selling concession. This reflects, among other things, investors’ perception that the bookrunner, being in charge of allotments, is more likely to allot shares to bids on which it will receive selling concession (see Jenkinson and Jones (2004, 2009)).…”

“…Regulators in the USA and the UK acted to address allocation abuses, including laddering, spinning and quid pro quo arrangements 1 . More recently, a growing body of academic research has noted the importance of broking relationships to IPO allocations, including Jenkinson and Jones (2004, 2009), Reuter (2006) and Ritter and Zhang (2006). Some have suggested abandoning the bookbuilding approach altogether in favour of alternative methods, in particular auctions where discretion over allocation would be removed.…”

Italian IPOs: Allocations and claw back clauses

“…The study of Cornelli and Goldreich (2001) analyzes the type of information revelation (in terms of bid types) that underwriters reward by an increased allocation of shares also in relation to the participation in less profitable IPOs. Some recent studies have looked in more detail at the composition of institutional investors and their ties to the underwriting syndicate that allocates shares (Jenkinson and Jones, 2009;Reuter, 2006;Gondat-Larralde and James, 2008). Ljungqvist and Wilhelm (2002) show that discretionary allocation of underpriced shares in favor of institutional investors is not a US phenomenon but applies equally to IPOs in the UK as well as in France and Germany.…”

Domestic and foreign institutional investors' investment in IPOs

“…One of the main changes in IPO regulation when it moved from a book-building to an auction mechanism was the removal of allocation discretion in the institutional investor category. Prior research has shown that underwriters' discretion in allocation influences how investors subscribe to IPO shares (Jenkinson and Jones, 2009). To address the issue that the change in regulation (from discretion to pro-rata allocation) may have influenced how investors participate in auction relative to book-building IPOs, we re-ran all our analyses (IPO subscription, analysis of IPO returns and post-IPO holdings) using only auction IPOs.…”