The usage and effects of overallotment arrangements in Swedish IPOs: An empirical study of IPOs on the Stockholm Stock Exchange 1999-2008

Detta är en D-uppsats från Handelshögskolan i Stockholm/Institutionen för finansiell ekonomi

Sammanfattning: The majority of Swedish IPOs nowadays include an overallotment arrangement which enables the underwriter to stabilize the share price of the IPO if it is needed. This thesis examines how the underwriter uses the overallotment arrangement, and what beneficial effects the arrangement has for investors and the seller of the IPO. Specifically, we examine if the underwriters stabilize the share price and use the accompanied overallotment option rationally to maximize their payoff. We also study if stabilization has any impact on the share price and if the seller benefits through less IPO underpricing by including an overallotment arrangement in the IPO. The empirical observations consist of IPOs on the main lists of the Stockholm Stock Exchange between 1999-2008. We find that: (1) underwriters generally use the overallotment arrangement as one would expect; (2) the price stabilization associated with the overallotment arrangement do impact the share price, but only for a limited time period; (3) sellers are not able to sell IPOs at more „fair value? if an overallotment arrangement is included. The findings suggest that it is the underwriters, and investors instantly selling their holdings, which are the primary beneficiary of the overallotment arrangement. The question to why the seller should include an overallotment arrangement in the first place remains unanswered.

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