Allocations, Adverse Selection and Cascades in Ipos Evidence from Israel

42 Pages Posted: 3 Nov 2008

See all articles by Yakov Amihud

Yakov Amihud

New York University - Stern School of Business

Shmuel Hauser

Ben-Gurion University of the Negev - School of Management; Government of the State of Israel - Israel Securities Authority

Amir Kirsh

Tel Aviv University - School of Computer Sciences

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Date Written: October 2001

Abstract

This paper examines three theories of IPO underpricing, using data from Israel where the allocations to subscribers are equally prorated and publicly known. Rock s (1986) theory of adverse selection is supported: subscribers receive greater allocations in overpriced IPOs. And, while the average IPO excess return is 12%, the simulated allocation weighted return to uninformed investors is slightly negative. Welch s (1992) theory of information cascades is supported by the pattern of allocations: demand is either extremely high or there is undersubscription, with very few cases in between. Also supported is the proposition that underpricing is a means to increase ownership dispersion.

Suggested Citation

Amihud, Yakov and Hauser, Shmuel and Kirsh, Amir, Allocations, Adverse Selection and Cascades in Ipos Evidence from Israel (October 2001). NYU Working Paper No. FIN-01-017, Available at SSRN: https://ssrn.com/abstract=1294480

Yakov Amihud (Contact Author)

New York University - Stern School of Business ( email )

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Shmuel Hauser

Ben-Gurion University of the Negev - School of Management ( email )

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Government of the State of Israel - Israel Securities Authority

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Amir Kirsh

Tel Aviv University - School of Computer Sciences ( email )

Tel Aviv, Raanana 43556
Israel

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