Over-subscription of IPO:

Initial public offerings are generally underpriced. Since the underwriters want to have the offering sell out quickly, they have an incentive to underprice the new securities. At the price offered there is excess demand, that is, demand usually exceeds the supply. Issues, in other words, are oversubscribed. Instead of prices being raised to the equilibrium level, there is extensive rationing. Typically, at the offer price there is excess demand, and shares are rationed to investors. All investors, both informed and uninformed are rationed. The observed rationing of informed investors runs counter to our intuition for two reasons. First, it contradicts the  optimal IPO mechanism that postulates that, amongst informed bidders, those with higher signals receive their full allocation before any shares are given to bidders with lower signals.

Second, it seems to contradict profit-maximization on the part of the seller. There is little evidence about who benefits from IPO underpricing and why. Do institutions receive larger allocations than individual investors? Do institutions concentrate on the most underpriced offerings because they are better informed than individual investors or because underwriters use their superior knowledge to intentionally favour their long-term clients? If, on the other hand, allocations to institutional investors are unrelated to first day returns, is it because institutions lack superior ability or because allocations of coveted underpriced shares carry the obligation of participating in overpriced issues? There have been reports of scandals in the allocation of heavily underpriced offerings.