Reallocation of IPO shares: emerging market evidence
International Journal of Managerial Finance
ISSN: 1743-9132
Article publication date: 3 May 2018
Issue publication date: 9 July 2018
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.
Keywords
Citation
Wadhwa, K. and Syamala, S.R. (2018), "Reallocation of IPO shares: emerging market evidence", International Journal of Managerial Finance, Vol. 14 No. 4, pp. 414-432. https://doi.org/10.1108/IJMF-06-2017-0106
Publisher
:Emerald Publishing Limited
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