I-3\ Investors typology:
Many empirical researches examining IPO
allocations focus on the distinction between types of investors: institutional
investors and individual or retail investors.
Institutional investors are different from retail investors,
in that institutions are better informed and more important clients. The
evidence to date suggests that where bookbuilding is used, institutional
investors receive preferential allocations. They are favoured by underwriters
in the IPO allocations compared to retail investors who are uninformed and not
very important clients since they do not buy many shares. Using U.S. data,
Hanley and Wilhelm (1995) and Aggarwal, Prabhala, and Puri (2002) find that
institutions are favoured, as do Cornelli and Goldreich (2001) using U.K. data.
Cornelli and Goldreich (2001) also find that more information-rich requests are
favourably rewarded.
Ljungqvist, Nanda and Singh (2003) 14 present a
model in which they distinguish between the two types of investors, and they
present these definitions:
The retail investors are small, unsophisticated investors who
are prone to episodes of optimistic or pessimistic «sentiment» about
the stock market, especially IPOs, where sentiment denotes incorrect beliefs
about the fundamental value of an asset arising from treating noise as relevant
information (Black (1986)).
The second type of investor holds beliefs that correspond to
an unbiased estimate of the issuing firm's future prospects. Ljungqvist, Nanda
and Singh (2003) regard institutional investors as belonging to this
category.
Ritter and Welch (2002) advance that institutions are
naturally blockholders, potentially capable of displacing poorly performing
management. That is why, this type of investors is favoured in IPO allocations,
and they are able to change and to improve the management and the performance
of the IPOs in which they invest.
Booth and Chua (1996), Brennan and Franks (1997), Mello and
Parsons (1998), and Stoughton and Zechner (1998) all point out that
underpricing creates excess demand and thus allows issuers and underwriters to
decide to whom to allocate shares. Surely, they will favour the institutional
investors for the advantages advanced from which they can take profit. These
institutional investors will monitor the IPO firm's management, creating a
positive externality.
Supporting the argument of favoured institutional investors in
IPO allocations, Ljungqvist, Nanda and Singh (2004), advance another
explanation. They show that value to an issuer is maximized by underwriters
allocating IPO shares to their regular (institutional) investors for gradual
sale to sentiment investors as they arrive in the market over time. Regulars
maintain stock prices by holding IPO stocks in inventory and restricting the
availability of shares.
Underpricing emerges as fair compensation to the regulars for
expected inventory losses arising from the possibility that sentiment demand
may cease.
But these advantages such improving the firm's performance and
management may not be of primary importance for some companies for corporate
control considerations.
14 in their article «Hot markets, Investor
sentiment and IPO pricing»
Retaining control for some managers is the primary and the
most important objective. When they are obliged to go public, they try to
protect their private benefits by favouring the individual investors rather
than institutions, since retail investors are not able to buy large volume of
IPO shares and they end up holding small parts. The managers seek to avoid
allocating large volume of shares for few important investors (institutions),
in order to protect the control of the management. Greater ownership dispersion
implies that the incumbent managers benefit from a reduced threat of being
ousted, because the most important part of the IPO firm still retained by its
managers and the other part is dispersed between many retail investors.
Going further in this point of view (control retain), Brennan
and Franks (1997) argue that managers deliberately underprice the IPO shares,
since underpricing generates excess demand. This gives the managers the
opportunity to protect their private benefits by allocating shares
strategically when taking their company public, favouring the retail investors
and then a greater ownership dispersion. So retaining control can be an
explanation for underpricing anomaly for some companies for which managers
consider their private benefits in the first place.
|