Private Ownership versus Institutional Ownership: Exclusion Pricing of Initial Public Offerings

The authors examine the literature with respect to the pricing of initial public offerings and focus upon the relationship of pricing to the structure and conduct of the investment banking industry. Using a data base of all share offerings undertaken in the United States over a two and a half year period, the authors find that there is considerable evidence for the proposition that large, prestigious, and well capitalised investment banks tend to price their share offerings at a higher absolute level than those not meeting such characteristics. Using classical statistical methods, the authors find that the pricing strategy of investment banks is connected to their affiliation with investment funds and unit trusts. The motives for such pricing strategies, the authors argue, lie with the affiliation of investment banks with investment funds, suggesting that the pricing of new share offerings may be a means of excluding retail investors from participating in the strong returns such issues exhibit. The authors raise legal and regulatory implications of their findings in the context of the general consolidation observed within the investment banking industry. This revised version was published online in July 2006 with corrections to the Cover Date.