Do anchor investors create value for initial public offerings? An empirical investigation

Abstract

The concept of anchor investors was introduced by the market regulator, Securities Exchange Board of India (SEBI), to bring transparency in the book building mechanism. We examine anchor investors' investment in initial public offerings (IPOs) to determine how they create value for issuing firms and participating investors. Using a database of 135 IPOs issued in the Indian market through book building mechanism during 2009–2014, we find that anchor investors' investment in IPOs reduces underpricing. Larger subscription from retail investors for anchor-supported IPOs indicates that anchor investors' participation is viewed as a credible attestation of quality of the issue. We document that anchor-supported IPOs are more liquid and less volatile in the short run. We also find that by controlling for other factors such as offer size, subscription rate and age of the firm, a part of the underpricing is reduced by anchor investors.

Keywords

• Underpricing
• Anchor investor
• IPO
• Subscription rate
• Liquidity
• Volatility
• Age of the firm
• Offer size
• Market condition