Mergers & Acquisitions

• Anti-Sandbagging And Other Anti-Ambush Clauses In Merger Agreements

Investment Banking & Broker/Dealers

• Investment Bankers Size Up 2007 Prospects

Global Markets

• Rocky Yet Promising Road Ahead For China's Banks

Private Equity & Venture Capital

• Corporate Expectations For Venture Capital's Noncash Support Exceed The Results

• How To Avoid Major Private Equity Pitfalls

• Best Exit Is Still An IPO ... Except When It Is A Private Sale

Initial Public Offerings

• Institutional Investors Reap Greatest Returns From IPOs

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Take the money and run. Institutional investors take the money left on the table by most IPO issuers. Typically, institutional investors flip their IPO shares on the first or second trading day, raking in the profits from IPO underpricing. During the first two days of trading, institutional investors flip an average of 42% of their IPO allocation, accounting for 15% of the total trading volume for the new issuance. Business professors Beatrice Boehmer, Ekkehart Boehmer, and Raymond Fishe compared that with the behavior of retail investors who have bought an initial IPO allocation. The latter flip only 19% of their allocation, which accounts for just 3% of the total volume. Most flipping is done in the first or second day after the IPO. In the remainder of the first month of trading, both institutional and retail investors sell only 10% more of their shares. Flipping increases when underpricing is greater, but retail investors are more influenced by the greater underpricing. While both groups make hefty profits during these early transactions, returns on IPOs tank after the first year and then tend to underperform. The headiest early trades are often followed by worse-than-average long-term performance, although not all IPOs perform badly over time.

Follow the leader. In making allocations, underwriters might be exercising discretion based on the shares' long- as well as short-term potential. Institutional investors receive higher allocations in the best-performing new issues, the authors' research indicates. They also seem to know which issues should be flipped and which held for longer periods. Some investors succeed in maximizing their long-term IPO returns as well as enjoying a first-day pop. The IPOs that perform best over both the short haul and the long term are those with the highest proportion of institutional allocations. Underwriters may well advise their best institutional clients based on each client's investment goals. Perhaps clients that want to take advantage of the first-day pop and flip much of their allocation immediately are guided to the more underpriced IPOs, while those looking for long-term investment receive allocations of IPOs that are less underpriced but more likely to perform well over time. Whatever the reason, institutional investors know when to flip and when to hold. Higher institutional flipping at the beginning indicates poorer long-term performance. Conversely, when institutional investors hold their stock, the shares tend to perform well.

Abstracted from Journal of Financial & Quantitative Analysis, published by School of Business Administration, University of Washington, 115 Lewis, Box 353200, Seattle, WA 98195-3200. To subscribe, call (206) 543-4598; or visit www.jfqa.org.