Allocations, Adverse Selection and Cascades in Ipos: Evidence from Israel

42 Pages Posted: 11 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. S-FI-01-08, Available at SSRN: https://ssrn.com/abstract=1298850

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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