Anchor investors are institutional investors who are offered shares in initial public offerings (IPOs) a day before the offer opens to the public. As the name suggests, they are supposed to “anchor” the issue by agreeing to subscribe to the shares at a fixed price. Roping in anchor investors gives signals to the market about the pricing of the issue. In this article, we examine anchor investors’ investment in 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 reduce underpricing i.e. anchor backed IPOs are less underpriced than non-anchor IPOs. The larger subscription from retail investors (for anchor backed IPOs) suggests that increasing participation of anchors in IPOs is viewed positively, particularly among retail individual investors. We also find that anchor supported IPOs are more liquid and less volatile in the short run i.e. at least the initial one month from listing. On the whole, our results suggest that anchor investors have significant impact on pricing, response rate, and secondary market liquidity and volatility. Our findings imply that in markets where credible certification is a matter of concern for retail investors, permitting anchor investors’ investment serves as a credible attestation of quality.
