Allocations, adverse selection, and cascades in IPOs: Evidence from the Tel Aviv stock exchange

Yakov Amihud, Shmuel Hauser, Amir Kirsh

Research output: Contribution to journalArticlepeer-review

97 Scopus citations


We examine theories of IPO underpricing using unique data from Israel where the allocation to subscribers is by equal proration. This enables us to simulate the return earned by uninformed investors. Consistent with Rock's (1986) theory of adverse selection, allocations were negatively related to underpricing. But uninformed investors earned a negative allocation-weighted initial return, although the average initial return was 12%. They could break even, however, by using publicly available information. The data also supports Welch's (1992) theory of information cascades: demand is either extremely high or there is undersubscription, with very few cases in between.

Original languageEnglish
Pages (from-to)137-158
Number of pages22
JournalJournal of Financial Economics
Issue number1
StatePublished - 1 Apr 2003
Externally publishedYes

Bibliographical note

Funding Information:
We thank Amir Barnea, Eli Berkovitch, Ari Ginsberg, Iftekar Hasan, Alexander Ljungqvist, Jay Ritter, Oded Sarig, N. Prabhala, participants of Yale Law School seminar and especially an anonymous referee for helpful comments and suggestions. Amihud is Ira Leon Rennerf Professor of Finance. The research was partially financed by the Israeli Institute for Business Research, Recanati Graduate School of Business, Tel Aviv University. We thank Dorit Korner for research assistance and the Library of the Tel Aviv Stock Exchange for providing data on IPOs.


  • IPO
  • Proration
  • Underpricing
  • Uninformed subscribers


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