ELSEVZER Journal of Financial Economics 37 (1995) 2399257 ECONOMICS Evidence on the strategic allocation of initial public offerings Kathleen Weiss Hanley”, William J. Wilhelm, Jr.*, “University of Maryland, College Park, MD 20742, USA bBoston College, Chestnut Hill, MA 02167, USA (Received August 1993; final version received May 1994) Abstract The evidence reported in this paper suggests that institutional investors capture a large fraction of the short-run profits associated with IPOs. The favored status enjoyed by institutional investors in underpriced offerings appears, however, to carry a quid pro quo expectation that they will participate in less-attractive issues as well. This finding conforms with the Benveniste and Spindt (1989) and Benveniste and Wilhelm (1990) prediction that U.S. underwriters behave strategically in the allocation of IPOs. Key words: Initial public offerings; Share allocation; Institutional investors JEL class&xtion: G24 1. Introduction Initial public offerings of equity (IPOs) are commonly oversubscribed (Ibbotson, 1975; Koh and Walter, 1989). In many countries, underwriters are legally bound to evenhandedly allocate shares among subscribers when over- subscription occurs (Loughran, Ritter, and Rydqvist, 1994). By contrast, under- writers bringing issues to market in the U.S. follow a ‘book-building’ approach in which offer prices arc conditioned on nonbinding pre-offer indications of *Corresponding author. The authors thank Larry Benveniste, Cliff Holderness, Albert Kyle, Robyn McLaughlin, Wayne Mikkelson, Vikram Nanda, Jay Ritter (the referee), Paul Seguin, Clifford Smith (the editor), Bob Taggart, and seminar participants at Boston College, Duke University, the University of Michigan, the Securities and Exchange Commission, and the 1993 meeting of the Western Finance Association for comments on earlier drafts of the paper. 0304-405X/95/$07.00 0 1995 Elsevier Science S.A. All rights reserved SSDI 0304405X9400797 5