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Why do IPO issuers grant overallotment options to underwriters?

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  • Jiao, Yawen
  • Kutsuna, Kenji
  • Smith, Richard

Abstract

In contrast to prior studies suggesting that overallotment option (OAO) provisions reflect underwriters' exploitation of IPO firms, we provide evidence that issuers benefit in several ways. We estimate that OAO provisions lead to lower total issue cost, less negative post-IPO performance, lower post-IPO volatility, and larger IPOs. OAO provisions are more likely for large firms undertaking relatively large IPOs, especially where a large portion of the shares are offered by selling shareholders. Our evidence also indicates that managers and other insiders may benefit if their shareholdings would be locked up unless the OAO call option feature was exercised.

Suggested Citation

  • Jiao, Yawen & Kutsuna, Kenji & Smith, Richard, 2017. "Why do IPO issuers grant overallotment options to underwriters?," Journal of Corporate Finance, Elsevier, vol. 44(C), pages 34-47.
    • Handle: RePEc:eee:corfin:v:44:y:2017:i:c:p:34-47
    DOI: 10.1016/j.jcorpfin.2017.02.011
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    References listed on IDEAS

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    Cited by:

    1. Dambra, Michael & Gustafson, Matthew T. & Pisciotta, Kevin, 2021. "What is the effect of an additional dollar of IPO proceeds?," Journal of Corporate Finance, Elsevier, vol. 66(C).

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    More about this item

    Keywords

    Overallotment options; Initial public offering; IPO pricing; Underpricing;
    All these keywords.

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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