A comparative analysis of IPO proceeds under alternative regulatory environments

Abstract

We study the effect on IPO proceeds of uniform-price restrictions and restrictions on the allocation of oversubscribed issues. Our model suggests that underwriters, given the opportunity to allocate IPOs among both regular and retail investors, would maximize proceeds by using a combination of price and allocation discrimination. Uniform-price restrictions increase the cost of soliciting information from regular investors and, when combined with evenhanded distribution restrictions, make information gathering impossible. We also provide conditions under which either adverse selection or the cost of soliciting information is likely to be the dominant force behind IPO discounting.