Laddering in Initial Public Offering Allocations

Abstract

Tying Initial Public Offering (IPO) allocations of common stock to after-listing purchases in the IPO shares, a process referred to as IPO laddering, has resulted in large-scale investigations of the major investment banks by the SEC and the National Association of Securities Dealers (NASD). This process is claimed to drive after-listing share prices above their fundamental values, and is illegal un- der the laws against market manipulation and fraud. As a result, investment banks are reluctant to distribute information about their allocation practices, so investigating the alleged laddering and its implications has proven to be difficult. With a new and unique dataset of 16,593 IPO allocations on the Oslo Stock Exchange (OSE), we confirm the SEC's suspicion that IPO allocations are dependent on after-listing trading. Allocations to after-listing purchasing investors has been combined with allocations to high brokerage commissions generating investors that can take advantage of the IPO laddering, thereby allowing invest- ment banks to recapture some of the money left on the table in IPOs. Allocated IPO investors buy more shares after new listings because they are rewarded for doing so with more IPO allocations.