We find that in allocating initial public offerings (IPOs), underwriters favor institutions they have previously worked with. Regular investors benefit more than casual investors in IPOs through greater participation in underpriced issues. Relationship participation is more important in the distribution of IPOs with stronger demand, IPOs of less liquid firms, and deals by less reputable underwriters. Overall, our results are consistent with book-building theories of IPOs. Interestingly, for 1999–2000 we find that regular investors receive even more underpriced IPOs relative to previous years while we do not find evidence that they provide additional services in IPOs.

We examine the evolution of insider ownership of IPO firms from 1970 to 2001 to understand how U.S. firms become widely held. A majority of these firms has insider ownership below 20% after 10 years. Stock market performance and liquidity play an extremely important role in ownership dynamics. Firms with stocks that are highly valued, are liquid, and have performed well experience large decreases in insider ownership and become widely held. Ownership also falls for low cash flow and high capital expenditures firms. Surprisingly, variables proxying for agency costs have limited success in explaining the evolution of insider ownership.