Tuesday, February 22, 2005

SSRN-Who Receives IPO Allocations? An Analysis of 'Regular' Investors by Ekkehart Boehmer, Raymond Fishe

SSRN-Who Receives IPO Allocations? An Analysis of 'Regular' Investors by Ekkehart Boehmer, Raymond Fishe

Boehmer and Fishe examine IPO participation. Consistent with previous literature, they find that there are regular (that is those who frequently participate) customers. These "regulars" are made up of both institutions and retail clients.

These regulars do not get their favored status for free as they often have to buy shares in "cold" IPOs as well as being allowed to buy in for hot IPOs.

A few highlights:
*"sample IPOs were completed during a “hot” cycle in the U.S. IPO market (Ritter and Welch (2002)). Although this period is unusual, there is no reason to believe that regular investors are treated differently during this period."

*""We find a sizable set of both institutional and retail investors who receive frequent allocations in IPOs. These regular investors receive greater monetary first-day gains, but lower average returns than other investors. This suggests that underwriters require regular investors to participate in weak offerings, but compensate them with continued access to underpriced shares."

* "...those accounts receiving only one allocation represent 22.8% of the sample....we find that nearly 39% of the sample receives allocations in nine or more IPOs. This increases to 55.6% for institutions and decreases to 34% for retail investors."

* "Thus, institutions receive more frequent allocations. What is surprising is that there are a large absolute percentage of retail investors in the higher allocation count quintiles. In terms of numbers, the top two quintiles contain twice as many retail as institutional accounts. This suggests that underwriters value both institutional and retail accounts as regular investors."

*"Overall, our results show that regular investors are an important beneficiary of initial IPO returns. They obtain larger wealth gains than infrequent investors, which are due to more frequent (but smaller) allocations in the best-performing IPOs....These results are generally consistent with Cornelli and Goldreich (2001) and Jenkinson and Jones (2002), who find that frequent participants receive more favorable allocations relative to investors’ demand schedules. Our analysis complements their results in that we can show that a cross-section of U.S. underwriters also treats regular investors favorably."

Interesting stuff!

Suggested Citation
Boehmer, Ekkehart and Fishe, Raymond P.H., "Who Receives IPO Allocations? An Analysis of 'Regular' Investors" (March 14, 2004). AFA 2005 Philadelphia Meetings. http://ssrn.com/abstract=517302

No comments: