A Dissection of Bookbuilt IPOs: Subscriptions, Underpricing, and Initial Returns

48 Pages Posted: 18 Mar 2009

See all articles by Arif Khurshed

Arif Khurshed

University of Manchester - Manchester Business School, Division of Accounting Finance

Alok Pande

Government of India; Indian Institute of Management (IIMB), Bangalore

Ajai K. Singh

Department of Finance, University of Central Florida

Multiple version iconThere are 2 versions of this paper

Date Written: March 17, 2009

Abstract

Certain unique characteristics of the Indian bookbuilding process allow us to study the timing and subscription pattern of different investor groups and to dissect the IPO returns into two distinct components: one relating to pre-listing underpricing set by the underwriter and the initial return from first day's trade in the post-listing period. The transparency of the bookbuilding process in India alleviates the winner's curse problem for the uninformed investors and we find that non-institutional buyers follow institutional investors' subscription patterns when bidding for the IPO shares. However, Indian IPOs still exhibit significant positive initial return in the post-listing aftermarket, even after the removal of the underwriters' power of discretionary allocations to preferred institutional clients. These results are inconsistent with Rock's (1986) winner's-curse explanation for positive IPO initial returns and also with that of Benevineste and Spindts' (1989) preferred allocation/information extraction quid pro quo model. We find that the IPO initial return is driven primarily by the unmet demand of the noninstitutional investor groups and consider these results to be generally supportive of Derrien (2005) and Ljungqvist, Nanda and Singh (2006).

Keywords: IPOs, bookbuilding, underpricing, winner's curse, sentiment traders

JEL Classification: G11, G15, G18

Suggested Citation

Khurshed, Arif and Pande, Alok and Singh, Ajai K., A Dissection of Bookbuilt IPOs: Subscriptions, Underpricing, and Initial Returns (March 17, 2009). Available at SSRN: https://ssrn.com/abstract=1361919 or http://dx.doi.org/10.2139/ssrn.1361919

Arif Khurshed

University of Manchester - Manchester Business School, Division of Accounting Finance ( email )

Crawford House
Oxford Road
Manchester, M15 6PB
United Kingdom
+44 0 161 275 4475 (Phone)
+44 0 161 275 4023 (Fax)

Alok Pande

Government of India ( email )

Indian Institute of Management (IIMB), Bangalore ( email )

Bannerghatta Road
Bangalore, Karnataka 560076
India

Ajai K. Singh (Contact Author)

Department of Finance, University of Central Florida ( email )

College of Business Administration
12744 Pegasus Drive
Orlando, FL 32816
United States
407-823-0761 (Phone)
407-823-6676 (Fax)

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