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

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

Date Written: January 2002

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.

Keywords: Initial public offerings, IPO underpricing

JEL Classification: G39

Suggested Citation

Amihud, Yakov and Hauser, Shmuel and Kirsh, Amir, Allocations, Adverse Selection and Cascades in Ipos: Evidence from the Tel Aviv Stock Exchange (January 2002). NYU Stern Department of Finance No. FIN-01-017, Available at SSRN: https://ssrn.com/abstract=293719 or http://dx.doi.org/10.2139/ssrn.293719

Yakov Amihud (Contact Author)

New York University - Stern School of Business ( email )

44 West 4th Street
Suite 9-190
New York, NY 10012-1126
United States
212-998-0720 (Phone)
212-995-4233 (Fax)

Shmuel Hauser

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

P.O. Box 653
Beer-Sheva 84105
Israel
+972 2 651 3939 (Phone)
+972 7 6472896 (Fax)

Government of the State of Israel - Israel Securities Authority

22 Kanfei Nesharim Street
Jerusalem 95464
Israel

Amir Kirsh

Tel Aviv University - School of Computer Sciences ( email )

Tel Aviv, Raanana 43556
Israel

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
465
Abstract Views
2,388
rank
76,258
PlumX Metrics