Allocations, Adverse Selection and Cascades in Ipos: Evidence from Israel
42 Pages Posted: 11 Nov 2008
Date Written: October 2001
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.
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