DEFINITION of 'Spinning'
The act by a brokerage firm or underwriter of offering shares in an IPO to preferred customers, as a means of retaining or obtaining their business. In theory, spinning benefits both parties; the underwriter or brokerage firm cultivates loyalty and/or a broader client base, while the preferred customer enjoys the benefits, i.e. equity gains, afforded by a dynamic new public company. However, the practice is controversial, as many consider it unethical.
Spinning is also known as "IPO spinning."
BREAKING DOWN 'Spinning'
Spinning is a lucrative means of enticing the business of large companies. By swaying the decision of the top executives, investment brokerage houses can secure a quid pro quo type of arrangement.
According to a 2009 study by professors Xiaoding Liu and Jay R. Ritter of the University of Florida, spinning does accomplish its goals. Liu and Ritter found that "spun" IPOs had first-day returns 23% greater than similar IPOs. In addition, the companies that were offered IPOs switched underwriters only 6% of the time, compared to 31% of the time for companies that were not offered IPOs. However, the study's authors also noted that "since 2001 the spinning of corporate executives has largely ceased in the U.S. This is due to both a regulatory crackdown and a dearth of hot IPOs to allocate."