Investor protection and institutional investors’ incentive for information production

Sagi Akron, Taufique Samdani

Research output: Contribution to journalArticlepeer-review

Abstract

We exploit a quasi-experimental setting in India to empirically demonstrate that non-discretionary allocation of book-building initial public offering (IPO) shares incentivizes institutional investors to understate the value of IPO shares in the primary market, so they can acquire shares at a lower price in the secondary market. Our IPO underpricing framework, which disentangles the effect of institutional investors’ incentive—associated with allocation policy, from the effect of underwriters’ risk—associated with underwriting contract, demonstrates that underpricing in book-building IPOs underwritten with firm-commitment contracts in India is higher in the post-September 2005 non-discretionary allocation investor protection period, than in the pre-September 2005 discretionary allocation period. Conversely, underpricing in fixed-price IPOs underwritten with firm-commitment contracts is lower in the post-September 2005 investor protection period than in the pre-September 2005 period. Overall, our findings, which are robust to endogneity concerns, reveal a policy tradeoff between information production and investor protection.

Original languageEnglish
Pages (from-to)1-15
Number of pages15
JournalJournal of Financial Stability
Volume30
DOIs
StatePublished - 1 Jun 2017

Bibliographical note

Publisher Copyright:
© 2017 Elsevier B.V.

Keywords

  • Book-building versus fixed-price IPO
  • Firm-commitment versus best-efforts contracting
  • IPO underpricing
  • Institutional investors and investor protection
  • Non-discretionary allocation

ASJC Scopus subject areas

  • Finance
  • Economics, Econometrics and Finance (all)

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