Laddering IPO shares

Abstract

Regulators, investors, and the financial media argue that underwriters tie Initial Public Offering (IPO) allocations to investor post-listing purchases in the issuer shares. Using unique data from the Oslo Stock Exchange (OSE) I investigate if these tie-in agreements are driven by price stabilization (reducing price falls below the offer price) or laddering (inflating prices above the offer price). I find that both stabilizing and laddering investors are rewarded with increased allocations for their service. However, only laddering investors increase allocations in very oversubscribed future issues. Secondary investors also lose from falling returns following laddering. I conclude that underwriters use both price stabilization and laddering across different IPOs. However, the rewards for cooperating investors and the economic consequences for secondary investors are much greater following laddering.

The decision to go public and the IPO underpricing with locally biased investors

“…As per Lowry et al (2010), the Maximum Likelihood Estimation (MLE) of ( 7) and ( 8) allows us to estimate the influence of each explanatory variable on both the level (IPO_IR) and the uncertainty (σIPO_IR) of firm-level initial returns, and OLS regression of initial returns on the same set of explanatory variables (that is, equation ( 7)) is the benchmark for comparing the MLE results. Initial returns of IPO stocks (IPO_IR) are measured as the percentage change from the offer price to the closing price on the 21st day of trading, to avoid the effects of underwriter price support (e.g., Aggarwal, 2000;Lewellen, 2006;Lyngnes Fjesme, 2019), while firm-and offer-specific characteristics control for firm information asymmetries or underwriter ability to estimate firm value. 34…”