Firms that go public produce information that influences the production decisions of their rivals as well as their own production decisions. If information-production costs are borne primarily by pioneering firms, market failures can occur in which both pioneers and followers remain private and make ill-informed investment decisions. Solving this coordination problem requires a transfer between pioneers and followers that leads to a more equitable distribution of information-production costs. We contend that investment banks can enforce such a transfer by effectively bundling IPOs within an industry. This suggests an explanation for clustering of IPOs through time and within industries. Journal of Economic Literature Classification Numbers: G24, G28, K32.

We estimate the structural links between IPO allocations, pre-market information production, and initial underpricing and find that (1) allocation policies favor institutional investors, both in the US and worldwide; (2) increasing institutional allocations results in offer prices that deviate more from the pre-marketing price range; (3) constraints on bankers’ discretion reduce institutional allocations and result in smaller price revisions, indicating diminished information production; and (4) initial returns are directly related to information production and inversely related to institutional allocations. Our results indicate that discretionary allocations promote price discovery in the IPO market and reduce indirect issuance costs for IPO firms.