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Abstract:
The U.S. book building method has become increasingly popular for initial public offerings (IPOs) worldwide over the last decade, whereas sealed bid IPO auctions have been abandoned in nearly all of the many countries in which they have been tried. I model book building, discriminatory auctions and uniform price auctions in an environment where the number of investors and the accuracy of investors' information is endogenous. Book building lets underwriters manage investor access to shares, allowing them to: 1) reduce risk for both issuers and investors; and 2) control spending on information acquisition, thereby limiting either underpricing or aftermarket volatility. Since more control and less risk are beneficial to all issuers, the advantages of book building's allocational flexibility may explain why global patterns of issuer choice are surprisingly consistent. My models also predict that offerings with higher expected underpricing will have lower expected aftermarket volatility; that an auction open to large numbers of potential bidders is vulnerable to inaccurate pricing and fluctuations in the number of bidders; and that both book built and auctioned IPOs will exhibit partial adjustment to public information.

Initial Public Offering, Equity Offering, IPO, Book Building, Uniform Price Auction, Discriminatory Auction, Endogenous Entry

Abstract:
This paper examines the book building mechanism for marketing initial public offerings. We present a model where the underwriter selects a group of investors along with a pricing and allocation mechanism in a way that maximizes the information generated during the process of going public at a minimum cost. Unlike previous models, we take into account the moral hazard problem that is faced by investors when evaluation is costly. Our results suggest that for firms with the most to gain from accurate pricing, the number of investors participating in the offering is larger, and underpricing will be greater. When the demand for accuracy is relatively low, the expected amount of underpricing exactly offsets the investors' costs of acquiring information. However, when the demand for accuracy is high, the expected amount of underpricing can exceed the cost of information and investors can earn rents.

Abstract:
This paper examines the book building mechanism for marketing initial public offerings. We present a model where the underwriter selects a group of investors along with a pricing and allocation mechanism in a way that maximizes the information generated during the process of going public at a minimum cost. Unlike previous models, we take into account the moral hazard problem that is faced by investors when evaluation is costly. Our results suggest that for firms with the most to gain from accurate pricing, the number of investors participating in the offering is larger, and underpricing will be greater. When the demand for accuracy is relatively low, the expected amount of underpricing exactly offsets the investors' costs of acquiring information. However, when the demand for accuracy is high, the expected amount of underpricing can exceed the cost of information and investors can earn rents.

Initial Public Offering, Equity Issue, Going Public, Book Building, Private Information

Abstract:
There is a global trend in initial public offerings towards the increased use of book building, the primary US method. A key difference between book building and other methods such as auctions is that, with book building, the underwriter has total discretion in allocating shares, allowing allocations to be based on a long term relationship between the underwriter and investors. This paper extends the work of Benveniste and Spindt on the importance of a multi-period setting when analyzing book building. In a multi-period model with endogenous (and costly) information acquisition, I show that the investment bank's ability to lower underpricing depends largely on its ability to favor regular uninformed investors. Among other things, this implies that the hybrid book building/open offer IPO method which is becoming increasingly popular internationally will lead to higher underpricing than straight book building.

Initial Public Offerings, Going Public, Book Building, Auctions, New Issues

Abstract:
There is a global trend in initial public offerings towards the increased use of book building, the primary US method. A key difference between book building and other methods such as auctions is that, with book building, the underwriter has total discretion in allocating shares, allowing allocations to be based on a long term relationship between the underwriter and investors. This paper extends the work of Benveniste and Spindt on the importance of a multi-period setting when analyzing book building. In a multi-period model with endogenous (and costly) information acquisition, I show that the investment bank's ability to lower underpricing depends largely on its ability to favor regular uninformed investors. Among other things, this implies that the hybrid book building/open offer IPO method which is becoming increasingly popular internationally will lead to higher underpricing than straight book building.

Initial Public Offerings, Going Public, Book-Building, Auctions, New Issues

Abstract:
We document a somewhat surprising regularity: of the many countries that have used IPO auctions, virtually all have abandoned them. The common explanations given for the lack of popularity of the auction method in the US, viz., issuer reluctance to try a new experimental method, and underwriter pressure towards methods that lead to higher fees, do not fit the evidence. We examine why auctions have failed and verify, to the extent possible, that they are consistent with what academic theory predicts. Both uniform price and discriminatory auctions are plagued by unexpectedly large fluctuations in the number of participants. The free rider problem and the winner's curse hamper price discovery and discourage investors from participating in auctions. Calculating the optimal bids in large multi-unit common value auctions with endogenous entry imposes a huge computational burden. With IPOs taking place sporadically, and each firm being different, auctions are likely to end up being unstable.

IPO, underpricing, auction, uniform price, discriminatory, winner's curse, free rider

Abstract:
The debate over the reform of the IPO process has focused mainly on replacing the currently used bookbuilding method with standard auctions. We point out that while standard auctions have the advantage that they are transparent, they may not be as good as bookbuilding in successfully bringing new equity issues to the market. We therefore suggest modifying the bookbuilding method in order to retain its advantages while at the same time making it transparent and encouraging retail participation.

IPO, Bookbuilding, Auctions, Method, Reform

Abstract:
We show that a simple, objective measure of media coverage is positively related not only to initial public offer (IPO) initial returns but also to long term value, analyst coverage and institutional investor ownership. The higher aftermarket stock price does not reverse over time, leading to greater long term underperformance, and media coverage is not related to underwriting fees, as predicted by sentiment investor explanations. Thus, our findings are most consistent with pre-IPO media coverage being related to genuine (as opposed to temporary, sentiment-driven) investor demand, as in Merton’s (1987) attention (aka investor recognition) model.

Role of media in finance, IPO, media coverage, underpricing, private information

Abstract:
This is Appendix D of the paper 'Why Do IPO Auctions Fail?' It contains information on IPO methods for 44 countries, including more details regarding our sources. We contacted stock exchanges and financial market regulators around the world, and also gathered information from academic sources and articles in the financial press. We focus on the three main IPO methods - book building, auctions and fixed price public offers - and organize the information for each country in terms of which methods are allowed, which are used and whether hybrids (combinations of two methods) are allowed or required.

IPO methods, country-specific, auctions, book building, fixed price public offers

Abstract:
Using a unique dataset of complete bid information for every IPO auction in Taiwan during 1995-2000, we examine the behaviors and returns of two groups - institutional and retail investors - in a setting in which underwriters do not have pricing or allocation discretion. We find that the bids of institutional investors are generally consistent with the predictions of IPO auction theory for informed bidders, while those of individual investors are not. Specifically, returns are higher when more institutional investors enter the auction or bid higher prices, suggesting institutional investors are informed and are also able to shave bids adequately. On the other hand, individual investors as a group exhibit return-chasing behavior, are uninformed, and systematically overbid.

IPO, auction, institutional investor, individual investor, retail investor, informed investor, IPO method, underwriter favoritism, underpricing, endogenous entry, partial adjustment, return chasing

Abstract:
We document a somewhat surprising regularity: of the many countries that have used auctions to place IPOs, most have abandoned them. We examine why this may be so, illustrating with suitably calibrated examples that: (a) bidding in auctions is difficult and even sophisticated investors can make mistakes, especially in face of uncertainty about the number and type of other bidders; (b) such mistakes can be costly not only for those who make them but also for other participants; (c) bidders who try to free ride on the efforts of others make bidding in auctions risky for everyone; and (d) rewarding price discovery requires restricting entry. We provide empirical evidence showing that, in countries that abandoned the auction method, IPO auctions were indeed plagued by unexpectedly large fluctuations in the number of participants, irrational return chasers, and free riders. Based on theoretical arguments, we develop a revenue-maximizing IPO mechanism that encourages price discovery, while at the same time allows participation by unsophisticated investors. Our empirical findings suggest that such a mechanism, which looks like a transparent version of book building, will have more desirable properties when compared to standard as well as hybrid auctions.

Abstract:
We document a somewhat surprising regularity: of the many countries that have used IPO auctions, virtually all have abandoned them. The common explanations given for the lack of popularity of the auction method in the US, viz., issuer reluctance to try a new experimental method, and underwriter pressure towards methods that lead to higher fees, do not fit the evidence. We examine why auctions have failed and verify, to the extent possible, that they are consistent with what academic theory predicts. Both uniform price and discriminatory auctions are plagued by unexpectedly large fluctuations in the number of participants. The free rider problem and the winner's curse hamper price discovery and discourage investors from participating in auctions. Calculating the optimal bids in large multi-unit common value auctions with endogenous entry imposes a huge computational burden. With IPOs taking place sporadically, and each firm being different, auctions are likely to end up being unstable.

Abstract:
We examine the effects of bidding experience on two groups of investors – individuals and institutions – in terms of their decisions to bid again and their bidding returns. Bidding histories are tracked for all 31,376 individual investors and 1,232 institutional investors across all 84 IPO auctions during 1995-2000 in Taiwan. For individual bidders: (1) high initial returns in IPO auctions increases the likelihood of participating in future auctions; (2) bidder returns steadily decrease as they participate in more auctions; (3) auction selection ability does not improve (and may get worse) with experience; and (4) greater experience is associated with more aggressive bid prices. These findings are consistent with naïve reinforcement learning wherein individuals become unduly optimistic after receiving good returns. In sharp contrast, there is little sign that institutional investors exhibit such behavior.

IPO, auction, investor behavior, learning, reinforcement learning, institutional investor, individual investor, experience.

Abstract:
Shelf registration gives underwriters greater flexibility in timing market issues and involves little or no increase in direct costs, since registration fees are exactly the same and underwriter fees seem comparable. Nevertheless, shelf equity issues are rare. I argue that erosion in the due diligence investigation of underwriters is a significant drawback to shelf registration, and this erosion explains the apparent puzzles in the data on shelf versus non-shelf issues. I compare the forecasts of my model to existing empirical evidence and conclude that shelf registration leads to both increased underwriter competition and reduced due diligence.

Seasoned equity offerings, follow-on equity, shelf registration, universal shelf, unallocated shelf, reduced due diligence

Abstract:
An interesting feature of the allocation of initial public offerings (IPOs) is that issuers in many countries tend to favor small over large investors. This occurs in the U.K., Hong Kong, Singapore, Malaysia, Indonesia, India, Thailand and Bangladesh, among other places. For example in Hong Kong between 1986 and 1992, around 85% of IPOs were allocated in a way that strictly favored smaller orders. The reason for favoring small investors over large investors is often thought to be some notion of "fairness". We develop a model to show that such a policy may, in fact, be consistent with revenue maximization by the issuing firm because it reduces the adverse selection or the "winner's curse" problem pointed out by Rock (1986). The intuition is that informed investors tend to place larger orders than do uninformed investors even when they have the same wealth level; this tendency is obviously stronger if informed investors tend to be wealthier than the uninformed. We derive other empirical implications of the model and relate them to the stylized facts about IPOs in various countries.

Winner's curse; Initial public offerings

Abstract:
We argue that when the offer price of an IPO is set many days before the issue closes for bidding by investors (as is the case in countries such as Hong Kong, Singapore and the U.K.), relevant price information leaks and becomes public knowledge before investors have finished bidding for firm's shares. Consequently, there are instances when all investors realize ex ante that the offer price is ``too low'' and we observe a large oversubscription for firm's shares. There are also instances when the investors realize that the offer price is ``too high'' and the issue fails. In order to reduce the likelihood of instances in which the issue fails, the offering is underpriced. We further argue that if the underwriter collects the interest float on checks deposited by investors for shares they bid, this interest revenue reduces the cost associated with underpricing and thus provides an incentive to underprice the issue further. Our analysis allows us to explore some empirical and policy implications.