Allocation of Initial Public Offerings and Flipping Activity

Abstract

There is general misperception that the large trading volume in initial public offerings (IPOs) in the aftermarket is mostly due to "flippers" that are allocated shares in the offering and immediately resell them in the aftermarket when the stock starts trading. We find that on average flipping accounts for only 19 percent of trading volume (median of 17 percent) and 15 percent of shares offered (median of 7 percent) during the first two days of trading; institutions do more flipping than retail customers; and hot IPOs are flipped much more than cold IPOs. It has been argued that institutions are strong hands that do not flip shares and are therefore allocated large proportions of an offering. However, we find that institutions consistently flip a larger proportion of their allocation than retail customers and that the hypothesis that institutions are smart investors that quickly flip cold IPOs while the underwriter is still providing price support is not true. Investment banks closely monitor flipping activity because excessive flipping can put downward pressure on the stock price, particularly of weak offerings. They have devised mechanisms, such as penalty bids, to restrict flipping activity. In our sample, explicit penalty bids are directly assessed only in a few IPOs and the total dollar penalties are small.