Reallocation of IPO shares: emerging market evidence

Abstract

Purpose The purpose of this paper is to study the reallocation of initial public offering (IPO) shares to retail investors, non-institutional buyers (NIBs) and qualified institutional buyers (QIBs). The authors examine how the reallocation process is related to the pricing decision of the underwriter. The authors also examine the long-run performance of the IPOs classified on the basis of the highest reallocation by retail investors, NIBs and QIBs. Design/methodology/approach The authors use regression analysis as well as 2SLS and three-stage least squares models to test the hypotheses. For long-run performance analysis, the authors adopt Carhart’s (1997) four-factor model. Findings First, the authors provide evidence that the reallocation of IPO shares for retail investors, NIBs and QIBs is frequent. Second, all three categories of investors are treated differently in the reallocation of underpriced shares. Third, the authors find that the reallocation and pricing strategies are interdependent and both the strategies are used by the underwriter to reward and favor retail investors for showing high level of demand. The authors find that in India, underwriters reward retail investors. Lastly, even though underwriters favor retail investors for reallocation, the authors find that IPOs which receive highest reallocation to retail investors perform poorly in the long run. Originality/value This paper is the first paper to show evidence of reallocation of IPO shares by underwriters for an emerging market. The paper is different from other papers as the regulatory regime present in the Indian markets is different from other markets.

Intellectual capital and subscription rate: an empirical investigation in the Indian initial public offering market

“…Our model’s inability to account for the subscription rate of QIBs in IPOs, based on the IC of issuing companies, can be largely attributed to the nuances of the information revelation theory. This theory suggests that QIBs rely more on disclosed insider information and their sophisticated analysis rather than public metrics like IC (Benveniste and Spindt, 1989; Wadhwa and Syamala, 2018).…”

Allocation discretion, price discounts and returns in Turkish initial public offerings

“…Lu and Samdani (2019) reach a similar conclusion in their study of Indian auction IPOs. Wadhwa and Syamala (2018) show that retail investors are favored in reallocations; however, often in IPOs with poor long-run performance. Mazouz et al (2017) study Hong Kong’s mandatory reallocation regime and conclude that mandatory clawback provision mitigates the winner’s curse.…”

“…Boreiko and Lombardo (2011) report 75.1% institutional allocation for Italian IPOs. Wadhwa and Syamala (2018) report statistics for Indian IPOs that are closer to the Turkish IPOs; which is due to protective regulations in India that limit the maximum allocation to institutions (Neupane et al , 2016). Operating in an emerging market, Turkish underwriters tend to require larger participation from uninformed investors to mitigate liquidity concerns (Rock, 1986; Chowdhry and Sherman, 1996).…”