Anchor Investors in IPOs

Anchor Investors in IPOs In July 2009, the Securities and Exchange Board of India (SEBI) permitted a version of bookbuilding in which IPO managers solicit bids from and allocate allocations to anchor investors in the IPO pre-market, subject to disclosure of the price, quantity, and identity of anchors participating in the pre-market bookbuilding. We obtain share allocation data in anchor IPOs. We characterize the nature of the share allocations in book built IPOs and examine its relation to bidding, short-term underpricing, overpricing, and flipping in IPOs. We find that anchor investors influence short-run IPO outcomes mainly through their effect on bidding, particularly bidding by other institutional investors and in hard-to-price issues, consistent with a certification effect. Anchor backed IPOs are not significantly different in underpricing, perform better over longer intervals of up to 1 year and exhibit lower volatility in returns over 1 year after the IPO. We find heterogeneity in anchor effects. Anchor identity and affiliation with underwriters matter as does the concentration of allocations across multiple anchors. Anchors do not appear to be short-term flippers. Preliminary counterfactual analyses suggest that transparent bookbuilding implicit in anchor issues is better than bookbuilding with secret books, the U.S. approach. Overall, there are few harmful effects and detectable benefits of anchor IPOs. How bookbuilding is used appears to be at least as important as whether bookbuilding is used. Transparency in bookbuilding dominates secrecy, and offers a potential solution to side-effects from giving underwriters free rein in allocation. JEL classification: G20, G24