The economic role of institutional investors in auction IPOs

Yuechan Lu and Taufique Samdani

Journal of Corporate Finance, 2019, vol. 56, issue C, 267-281

Abstract: We examine the economic role of institutional investors in auction initial public offerings (IPOs) with and without a discretionary tranche of IPO shares pledged to institutional investors prior to public filing. We find that underpricing in auction IPOs with a discretionary tranche is lower (higher) than underpricing in auction IPOs without a discretionary tranche when institutional demand for IPO shares is high (low). The findings, which hold after controlling for potential endogeneity, reveal a cost-benefit tradeoff in auction IPOs that is sensitive to institutional demand, and explain why auction, albeit commonly used for debt instruments, is rarely used for IPOs.

Keywords: Auction IPO; Discretionary allocation; IPO underpricing; Institutional investors; Quid pro quo; Winner's curse (search for similar items in EconPapers)
JEL-codes: G15 G18 G24 G28 G38 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:56:y:2019:i:c:p:267-281

DOI: 10.1016/j.jcorpfin.2019.02.004

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