Spinning

AAA

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."

INVESTOPEDIA EXPLAINS '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."

RELATED TERMS
  1. Laddering

    The promotion of inflated pre-IPO prices for the sake of obtaining ...
  2. Impact Day

    The date on which a corporation makes a secondary offering of ...
  3. Quid Pro Quo

    A Latin phrase meaning "something for something". This term is ...
  4. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs ...
  5. Bad Faith Insurance

    An insurance company’s appalling or malicious refusal to pay ...
  6. UDAAP

    Misleading or harmful behaviors by those who offer financial ...
RELATED FAQS
  1. Why do banks used the Five Cs of Credit?

    Banks use rigorous policies and analyses when determining if and how much money to lend to clients. The methods used by banks ... Read Full Answer >>
  2. How do I purchase shares of a closed-end investment?

    Unlike open-end mutual funds that sell shares in the fund directly to investors, closed-end funds are traded on an exchange ... Read Full Answer >>
  3. What advantages do corporations have over privately held companies?

    The chief advantage that most publicly traded corporations enjoy – and the primary reason why private companies decide to ... Read Full Answer >>
  4. What does the underwriter do in a new stock offering?

    The underwriter in a new stock offering serves as the intermediary between the company seeking to issue shares in an initial ... Read Full Answer >>
  5. What is the best form of equity financing for a start-up company?

    Raising capital during the startup phase of a business can present challenges to an entrepreneur. Debt financing is difficult ... Read Full Answer >>
  6. What are some advantage of raising capital through private placement?

    Small businesses face the constant challenge of raising affordable capital to fund business operations. Equity financing ... Read Full Answer >>
Related Articles
  1. Retirement

    Pages From The Bad CEO Playbook

    Excess compensation, golden parachutes, tunneling and IPO spinning make these bad executives even worse.
  2. Retirement

    IPO Basics Tutorial

    What's an IPO, and how did everybody get so rich off them during the dotcom boom? We give you the scoop.
  3. Economics

    What is a Moral Hazard?

    The risk that a party to a transaction has not entered into the contract in good faith, or has provided misleading information.
  4. Economics

    Understanding Externality

    An externality is a consequence of an economic activity that is experienced by unrelated third parties.
  5. Investing Basics

    Social Media: High Risk, High Potential Returns

    Carefully selecting social media ETFs can provide you with the opportunity to diversify your portfolio and enjoy financial rewards due to user growth.
  6. Investing

    4 Hottest IPOs in 2015

    Where is smart money headed this year? These are the most anticipated IPOs of 2015.
  7. Investing

    What's a Transfer Price?

    A transfer price is what one unit of a business charges another unit of the same business for a good or service. The transfer price is usually close to the prevailing market rate when different ...
  8. Investing News

    Investing In Social Media Startups? Read This First

    Several new social media startups are attracting large amounts of funding, based on their prospects of retaining a large user base and generating profits.
  9. Fundamental Analysis

    Private vs Public Equity: What's Best?

    What is the better way for a company to attract investors; by making its stock available for sale to whoever wants some, or by petitioning rich people?
  10. Investing

    What's a Monopolistic Market?

    A monopolistic market has a significant number of characteristics of a pure monopoly. Though there may be more than one supplier, the market has high prices, suppliers tightly control availability ...

You May Also Like

Hot Definitions
  1. Venture-Capital-Backed IPO

    The selling to the public of shares in a company that has previously been funded primarily by private investors. The alternative ...
  2. Merger Arbitrage

    A hedge fund strategy in which the stocks of two merging companies are simultaneously bought and sold to create a riskless ...
  3. Market Failure

    An economic term that encompasses a situation where, in any given market, the quantity of a product demanded by consumers ...
  4. Unsystematic Risk

    Company or industry specific risk that is inherent in each investment. The amount of unsystematic risk can be reduced through ...
  5. Security Market Line - SML

    A line that graphs the systematic, or market, risk versus return of the whole market at a certain time and shows all risky ...
  6. Tangible Net Worth

    A measure of the physical worth of a company, which does not include any value derived from intangible assets such as copyrights, ...
Trading Center