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Underwriters' allocation with and without discretionary power: evidence from the Hong Kong IPO market

Mazouz, Khelifa ORCID:, Mohamed, Abdulkadir, Saadouni, Brahim and Ying, Shuxing 2017. Underwriters' allocation with and without discretionary power: evidence from the Hong Kong IPO market. International Review of Financial Analysis 49 , pp. 128-137.

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This study uses a unique and extensive data set from the Hong Kong IPO market to examine the theory of adverse selection under two distinct regulatory regimes in relation to underwriters’ discretionary power in IPO share allocation. Consistent with Rock’s (1996) theory of adverse selection in the IPO market, we show that, prior to the introduction of the clawback provision, retail (uninformed) investors were allocated more of the overpriced offerings and less of the underpriced issues. However, after the provision is implemented, retail investors have been allocated significantly more of the underpriced offerings and less of the overpriced ones. Overall, we find that allocation-adjusted initial returns for the retail investors are lower (higher) than the risk-free rate pre- (post-) clawback provision. These findings imply that the mandatory clawback provision has enhanced the fairness in IPO share allocations among different investor groups and has reduced the winner’s curse in the IPO market.

Item Type: Article
Date Type: Publication
Status: Published
Schools: Business (Including Economics)
Subjects: H Social Sciences > HJ Public Finance
Uncontrolled Keywords: mandatory clawback, adverse selection, allocation-adjusted returns
Publisher: Elsevier
ISSN: 1057-5219
Date of First Compliant Deposit: 10 January 2017
Date of Acceptance: 30 December 2016
Last Modified: 04 Nov 2022 07:59

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