When do Investment Banks use IPO Price Support?

Abstract

Practitioners, regulators, and the financial media argue that underwriters tie initial public offering (IPO) allocations to investor post-listing buying of the issuer shares in a process labelled price support. Arguably, this excess demand boosts post-listing returns which underwriters trade quid pro quo with investor stock-trading commission payments. In this paper, I investigate unique data from the Oslo Stock Exchange (OSE) including investor stock-trading commissions, IPO allocations, and post-listing trading. I document that investors who provide high returns to underwriters before IPOs benefit from price support through increased returns in IPOs. I conclude that price support is used when investors share boosted returns with underwriters