What determines institutional investors' holdings in IPO firms?

We investigate the manner in which institutional investors' investments in IPO firms are related to IPO characteristics and pre-IPO operating performance. We find that institutions' initial holdings are strongly related to the public float (the fraction of shares floated to the public), but are unrelated to the ratio of primary-to-total shares issued. This suggests that institutions prefer IPOs that are associated with ownership structure change, and are indifferent to whether the motivation behind the IPO is fund raising or original owners' value liquidation. Moreover, initial institutional holdings are unrelated to commonly used measures of pre-IPO operating performance such as return on sales and return on assets. We also find that institutions are predisposed to invest in value firms rather than growth firms.