Is Bookbuilding an Efficient IPO Pricing Mechanism? - The Indian Evidence

Abstract

This paper attempts to examine efficiency of IPO issuing mechanisms using a sample of Indian IPOs that tapped the capital markets during 2003-07 by taking in to consideration the total costs the issuers have to face i.e., by including both direct costs as well as indirect costs. We find that from a total cost point of view the issuers are neither better off nor worse off using either bookbuilding or the fixed price offers in the older regime when the lead managers had the power to make discriminatory allocation, but sans those powers in the new regime issuers are better off with fixed price offers. Our results also showed that the Issue expenses associated with Bookbuilding are more than those associated with fixed price offers after controlling for issue size and the firm specific characteristics. Further analysis showed that employing US based lead managers do not translate in to higher issue proceeds. Finally, the costs of the services of US lead managers are not significantly different from those of Indian lead managers.