The role of anchor investors in initial public offerings

Do capital market regulations improve the efficiency of allocation of capital to IPO firms? We answer this question by examining a regulation in India that allows IPO firms to seek investment from lead (anchor) institutional investors. Using a sample of 158 anchor investor‐backed IPOs and 689 non‐anchor IPOs from 2006 to 2020, we find that anchor‐backed IPO firms are more profitable and sell at higher valuations. These IPOs raise more equity than non‐anchor firms, and anchor‐backed firms with higher productivity of capital raise more equity than other firms. We find that anchor‐backed IPOs experience a significant improvement in profitability and Q over 4 years after the IPO. Anchor backing is associated with a lower probability of the stock being downgraded to lower categories of listing and less illiquidity. Our results suggest that capital market regulations can be effective in directing capital to firms with higher investment efficiency.