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Analyst Hype in IPOs: Explaining the Popularity of Bookbuilding

Francois Degeorge

University of Lugano - Faculty of Economics; Swiss Finance Institute; European Corporate Governance Institute (ECGI)

François Derrien

HEC Paris - Finance Department

Kent L. Womack

University of Toronto - Rotman School of Management (deceased)

AFA 2006 Boston Meetings Paper

The bookbuilding procedure for selling initial public offerings (IPO) to investors has captured significant market share from auction alternatives in recent years, despite the significantly lower costs related to the auction mechanism in terms of direct fees and initial underpricing. This article shows that in the French market, where the frequency of bookbuilding and auctions was approximately equal in the 1990s, the ostensible advantages to the issuer using bookbuilding were advertising-related benefits. Specifically, we find that book-built issues were more likely to be followed and positively recommended by the lead underwriters, as well as to receive "booster shots" after issuance if the shares had fallen. Even nonunderwriters' analysts appear to promote book-built issues more but only as a way of currying favor with the IPO underwriter for allocations of future deals. Yet we do not observe valuation or post-IPO return differentials that suggest these types of promotion have any value to the issuing firm. We conclude that underwriters using the bookbuilding procedure have convinced issuers of the questionable value of the advertising and promotion of their shares.

Number of Pages in PDF File: 53

Keywords: IPOs auctions

JEL Classification: G24

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Date posted: March 25, 2005  

Suggested Citation

Degeorge, Francois and Derrien, François and Womack, Kent L., Analyst Hype in IPOs: Explaining the Popularity of Bookbuilding. AFA 2006 Boston Meetings Paper. Available at SSRN: http://ssrn.com/abstract=686922 or http://dx.doi.org/10.2139/ssrn.686922

Contact Information

Francois Degeorge
University of Lugano - Faculty of Economics ( email )
via Giuseppe Buffi 13
CH-6904 Lugano
41 58 666 4634 (Phone)
41 58 666 4647 (Fax)
Swiss Finance Institute ( email )
c/o University of Geneve
40, Bd du Pont-d'Arve
1211 Geneva, CH-6900
HOME PAGE: http://www.istfin.eco.usi.ch/personal-info?id=705
European Corporate Governance Institute (ECGI)
B-1050 Brussels
François Derrien
HEC Paris - Finance Department ( email )
1 rue de la Liberation
Jouy-en-Josas Cedex, 78351
33 1 39 67 72 98 (Phone)
HOME PAGE: http://www.hec.fr/derrien

Kent L. Womack (Contact Author)
University of Toronto - Rotman School of Management (deceased)

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