This article was produced and financed by BI Norwegian Business School

There are many who will buy shares prior to new listing on the Oslo Stock Exchange. They are often sold at a good price. (Photo: iStockphoto)

Skimming the cream of the shares

Investors who generate the most in brokerage commission are allowed to buy lucrative shares sold at initial public offerings on the Oslo Stock Exchange.

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BI Norwegian Business School

BI is a private and independent business school in Norway.

When a private limited company goes public on the Oslo Stock Exchange, it can raise capital through a share issue prior to being listed. The company’s bank/brokerage firm handles the sale of the shares in connection with the stock exchange introduction.

Shares sold prior to new listing on the stock exchanges of the world are often sold at very good prices, i.e. underpriced. They are considered lucrative investments with high expected short-term return.

Normally, these share issues are oversubscribed many times over, and only a small group of investors are allowed to invest in these issues.

Who gets to buy the golden shares?

Sturla Lyngnes Fjesme has solved a share mystery. (Photo: Audun Farbrot)

Many investors - especially those that do not get the chance to buy - and also finance researcher have wondered who are allowed to buy the lucrative shares.

There are three main views on how the shares in initial public offerings are allocated to investors prior to the stock exchange introduction.

  1. The shares are allocated to investors who have assisted the bank/brokerage firm in the pricing of the shares. The allocation of shares is a form of reward/payment for jobs done/services rendered.
  2. The shares are allocated to long-term investors. The company itself will often prefer investors that will hold on to the shares for a long time. This creates a price stability that can be beneficial for the new listed company.
  3. Banks/brokerage firms allocate the shares to their most profitable customers, the investors who, through selling and buying shares, provide the highest brokerage commission income for the banks 

8 per cent in one day

In his doctoral thesis, Sturla Lyngnes Fjesme at the BI Norwegian Business School has tried to solve this share mystery: Who gets to buy the banks’ golden shares?

Together with Professor Øyvind Norli at the BI Norwegian Business School and  Professor Roni Michaely at Cornell University in the US, Fjesme studied the 207 initial public offerings made prior to stock exchange listing on the Oslo Stock Exchange from 1993 to 2007.

The study confirms that these are very lucrative investments. On average, the prices of these shares increased by an impressive 8 per cent on their first day of trading on the Oslo Stock Exchange.

“This is a very high short-term return,” states Fjesme.

Unique data

Fjesme and his research colleagues have had access to data that make it possible to apply the three proposed theories for allocation of shares in one study. This has not been done previously.

The study shows that there is a strong and robust connection between the amount of brokerage commission that the investors have generated to the bank and how many shares they get to buy in share issues in new listings on the stock exchange.

“The investors that generate the most in brokerage commission to the bank are the same who are allowed to buy the most shares in new listings,” concludes Sturla Lyngnes Fjesme.

The researches find no indications of the shares being allocated to patient investors or those who have assisted in pricing the shares prior to the stock exchange listing.


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