Bookbuilding Vs. Fixed Price Revisited: The Effect of Aftermarket Trading
Walid Y. Busaba
University of Western Ontario - Ivey School of Business
Department of Financing and Accounting, China Europe International Business School (CEIBS); China Academy of Financial Research (CAFR)
October 30, 2009
Journal of Corporate Finance, Forthcoming
Investors who possess information about the value of an IPO can participate in the offering as well as trade strategically in the aftermarket. Both the bookbuilding and the fixed price IPO selling methods require more underpricing when aftermarket trading by informed investors is considered. Bookbuilding becomes especially costly, since the potential for profit in the aftermarket adversely affects investors’ bidding behavior in the premarket. Unless the underwriter can restrict its bookbuilding effort to a small enough subset of the informed investors, a fixed price strategy that allocates the issue to retail investors produces higher proceeds on average, contrary to the conventional wisdom in the literature. We therefore find a benefit to limiting access to the premarket and, hence, provide an efficiency rationale for the practice by American bankers of marketing IPOs to a select group of investors. We also provide unique policy and empirical implications.
Number of Pages in PDF File: 45
Keywords: Initial public offerings, Bookbuilding, Fixed price, Price discovery, Aftermarket trading
JEL Classification: K2, D4, D8, L1, G2, G3Accepted Paper Series
Date posted: January 15, 2010 ; Last revised: September 7, 2012
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