Aftermarket Trading and the Strategic Allocation of Shares in an Initial Public Offering

10.6291/AIAPM.2014.06.09

Sarah Parlane；Fabrice Rousseau

Initial Public Offerings ； Bookbuilding ； Strategic Allocation ； Asymmetric Information

Advances in Investment Analysis and Portfolio Management

6期（2014 / 04 / 01）

221 - 262

英文

This paper characterizes the strategic allocation of shares and the offer prices that maximize the expected proceeds from an initial public offering in a setting that incorporates aftermarket trading. The optimal allocation of shares trades-off the pre-market and aftermarket adverse selection costs. We show that flipping can be beneficial to the issuer, even when some investors make profits in the aftermarket. Flipping facilitates truthful information revelation during the offering. The rents can be used, in some instances, to reward informed investors in lieu of the traditional informational rents. The main determinant of the stock allocation is not the size of the rents captured by flippers but the extent to which some investors benefit from their informational advantage in the aftermarket. Finally the results indicate that the considerable latitude granted to underwriters under bookbuilding in relation to the allocation of shares is essential to control the aftermarket trading so as to increase the issuer's revenue.

1. Siconolfi, M., & McGeehan, P. (1998, June). Flip side: Wall Street brokers press small investors to hold IPO shares -- big institutions can cash out quickly; the “Little Guy” can't without penalties -- rife with double standards. The Wall Street Journal, A1.
2. Boehmer, E., & Fishe, R. P. H. (2000). Do underwriters encourage stock flipping? A new explanation for the under-pricing of IPOs. Working paper, EDHEC Business School, Roubaix, France.
3. Goyal, V., & Tam, L. (2009). Investor Characteristics, Relationships and IPO Allocations, mimeo. Unpublished manuscript..
4. Aggarwal, R.(2003).Allocation of initial public offerings and flipping activity.Journal of Financial Economics,68,111-135.
5. Aggarwal, R.(2000).Stabilization activities by underwriters after IPOs.Journal of Finance,55,1075-1103.
6. Aggarwal, R.,Prabhala, N. R.,Puri, M.(2002).Institutional allocation in initial public offerings: Empirical evidence.The Journal of Finance,57,1421-1442.
7. Bennouri, M.,Falconieri, S.(2006).Optimal auctions with asymmetrically informed bidders.Economic Theory,28,585-602.
8. Benveniste, L. M.,Spindt, P. A.(1989).How investment bankers determine the offer price and allocation of new issues.Journal of Financial Economics,24,343-361.
9. Boehmer, B.,Boehmer, E.,Fishe, R. P. H.(2006).Do institutions receive favorable allocations in IPOs with better long-term returns?.Journal of Financial and Quantitative Analysis,41,809-828.
10. Booth, J. R.,Chua, L.(1996).Ownership dispersion, costly information, and IPO underpricing.Journal of Financial Economics,41,291-310.
11. Bradley, D. J.,Gonas, J. S.,Highfield, M. J.,Roskelley, K. D.(2009).An examination of IPO secondary market returns.Journal of Corporate Finance,15,316-330.
12. Bubna, A.,Prabhala, N. R.(2011).IPOs with and without allocation discretion: Empirical evidence.Journal of Financial Intermediation,20,530-561.
13. Busaba, W. Y.,Chang, C.(2010).Bookbuilding vs. fixed price revisited: The effect of aftermarket trading.Journal of Corporate Finance,16,370-381.
14. Carter, R. B.,Dark, F. H.(1993).Underwriter reputation and initial public offers: The detrimental effects of flippers.The Financial Review,28,279-301.
15. Chemmanur, T. J.,Hu, G.,Huang, J.(2010).The role of institutional investors in initial public offerings.Review of Financial Studies,23,4496-4540.
16. Chen, H. C.,Fock, R. C. W.,Kang, S.(2010).Issuer's incentives and tests of Baron's model of IPO under-pricing.Review of Quantitative Finance and Accounting,35,71-87.
17. Chen, Z.,Wilhelm, W. J., Jr.(2008).A theory of the transition to secondary market trading of IPOs.Journal of Financial Economics,90,219-236.
18. Chiang, Y. M.,Qian, Y.,Sherman, A.(2010).Endogenous entry and partial adjustment in IPO auctions: Are institutional investors better informed?.Review of Financial Studies,23,1200-1230.
19. Cornelli, F.,Goldreich, D.(2003).Bookbuilding: How informative is the order book?.Journal of Finance,58,1415-1443.
20. Cornelli, F.,Goldreich, D.(2001).Bookbuilding and strategic allocation.Journal of Finance,56,2337-2369.
21. Daniel, K.(2002).Discussion of "Why don't issuers get upset about leaving money on the table in IPOs?".Review of Financial Studies,15,445-454.
22. Dimovski, W.,Philavanh, S.,Brooks, R.(2011).Underwriter reputation and underpricing: Evidence from the Australian IPO market.Review of Quantitative Finance and Accounting,37,409-426.
23. Ellul, A.,Pagano, M.(2006).IPO under-pricing and after-market liquidity.Review of Financial Studies,19,381-421.
24. Gao, F.,Siddigi, M. A.(2012).The rationale for IPO lockup agreements: Agency or signalling.Review of Pacific Basin Financial Markets and Policies,15,1-18.
25. Gondat-Larralde, C.,James, K. R.(2008).IPO pricing and share allocation: The importance of being ignorant.Journal of Finance,68,449-478.
26. Guo, H.(2011).IPO first-day return and the ex ante equity premium.Journal of Financial and Quantitative Analysis,46,871-095.
27. Guo, R. J.(2005).Information collection and IPO under-pricing.Review of Quantitative Finance and Accounting,25,5-19.
28. Hanley, K.,Wilhelm,W. J., Jr.(1995).Evidence on the strategic allocation of initial public offerings.Journal of Financial Economics,37,239-257.
29. Jenkinson, T.,Jones, H.(2009).Competitive IPOs.European Financial Management,15,733-756.
30. Jenkinson, T.,Jones, H.(2004).Bids and allocations in European IPO bookbuilding.Journal of Finance,59,2309-2338.
31. Killian, L.,Smith, K.,Smith, W.(2001).IPOs for everyone: The 12 secrets of investing in IPOs.Hoboken, NJ:Wiley.
32. Kim, B. J.,Kish, R. J.,Vasconcellos, G. M.(2002).The Korean IPO market: Initial returns.Review of Pacific Basin Financial Markets and Policies,5,219-253.
33. Nguyen, H.,Dimovski, W.,Brooks, R.(2010).Under-pricing, risk management, hot issue and crowding out effects: Evidence from the Australian resources sector initial public offerings.Review of Pacific Basin Financial Markets and Policies,13,333-361.
34. Sherman, A.(2000).IPOs and long-term relationships: An advantage of book building.Review of Financial Studies,13,697-714.
35. Sherman, A.,Titman, S.(2002).Building the IPO order book: Underpricing and participation limits with costly information.Journal of Financial Economics,65,3-29.