When do investment banks use IPO price support?

Abstract

Practitioners, regulators, and the financial media argue that underwriters tie initial public offering (IPO) allocations to investor post-listing buying of the issuer shares in a process labelled price support. Arguably, this excess demand boosts post-listing returns which underwriters trade quid pro quo with investor stock-trading commission payments. In this paper, I investigate unique data from the Oslo Stock Exchange (OSE) including investor stock-trading commissions, IPO allocations, and post-listing trading. I document that investors who provide high returns to underwriters before IPOs benefit from price support through increased returns in IPOs. I conclude that price support is used when investors share boosted returns with underwriters.

Can ESG activities stabilise IPO prices? Evidence from the Hong Kong stock market

“…Our study contributes to the literature by being the first to examine the direct link between ESG activities and price stabilisation, providing an innovative ESG approach to understanding the underwriters' motivation to stabilise IPO prices. Contrary to previous studies that attribute price stabilisation to market factors (Carvalho et al, 2020; Jiao et al, 2017) and underwriter characteristics (Fjesme, 2019; Lewellen, 2006; Mazouz et al, 2013), we find that IPO issuers' ESG activities influence price stabilisation. By decomposing ESG's three pillars, we find that the each pillar's activity has a different impact on price stabilisation.…”

Is money really left on the table? The role of regular investors in IPO pricing

“…More specifically, we test whether and how the strength of such relationships leads to variation of the partial adjustment: all else being equal, a larger partial adjustment would result in lower underpricing (benefiting the issuer), as predicted by BS, while a lesser partial adjustment would result in ‘excess underpricing’ (favoring regular investors, as first suggested by Reuter, 2006). This last result, if confirmed, would contribute to the agency‐based literature, which has highlighted the opportunistic behaviors that underwriters adopt in terms of preferential allocation to regular investors, either in exchange for analyst coverage (Degeorge et al, 2007) or in a quid pro quo for brokerage commissions (Fjesme, 2019; Jenkinson & Jones, 2009; Reuter, 2006). Different from this literature, which is mainly based on IPO allocations, our intent is to add evidence on the effects that repeated interactions have on IPO pricing.…”

“…Another stream of literature has focused on how underwriters' opportunistic behaviors benefit regular investors. These agency-based contributions (Loughran & Ritter, 2002;Ritter & Welch, 2002) have maintained that lead underwriters could favor regular investors with preferential allocations of highly underpriced shares in a quid pro quo exchange for other business lines, such as commission revenues from aftermarket trading (Fjesme, 2019;Goldstein et al, 2011;Jenkinson & Jones, 2009;Jenkinson et al, 2018;Nimalendran et al, 2007;Reuter, 2006) or analyst coverage (Degeorge et al, 2007). Nevertheless, scholars have yet to produce direct evidence that such opportunistic behaviors also affect pricing and ultimately represent a cost to the issuer.…”

Laddering IPO shares

“…Fjesme documents that nonallocated secondary investors misinterpret the post-listing buying as positive information and thereby increase holdings that eventually leads to huge losses. Fjesme (2018) document that price support is more often used when shares are allocated to high stock-trading commission investors.…”