Allocations, Adverse Selection and Cascades in Ipos: Evidence from the Tel Aviv Stock Exchange
NYU Stern Department of Finance No. FIN-01-017
40 Pages Posted: 14 Dec 2001
Date Written: January 2002
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.
Keywords: Initial public offerings, IPO underpricing
JEL Classification: G39
Suggested Citation: Suggested Citation