Allocation to Anchor Investors, Underpricing, and the After-Market Performance of IPOs

We study bidding by anchor investors in a two-stage initial public offering (IPO) process and document a negative, causal relation between allocation to anchor investors and underpricing. We find that anchor investors are likely to invest in hard-to-place offerings characterized by valuation uncertainty. We also document a positive relation between allocation to reputed anchor investors and returns up to lock-up expiration. Our evidence provides support for information revelation and targeting specific investors’ theories of book building. Anchor-backed IPOs earn superior returns mainly due to monitoring. Who bids in an IPO seems to matter just as particular types of bids do.