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Bookbuilding Vs. Fixed Price Revisited: The Effect of Aftermarket Trading

45 Pages Posted: 15 Jan 2010 Last revised: 7 Sep 2012

Walid Y. Busaba

University of Western Ontario - Ivey Business School

Chun Chang

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF)

Multiple version iconThere are 2 versions of this paper

Date Written: October 30, 2009

Abstract

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.

Keywords: Initial public offerings, Bookbuilding, Fixed price, Price discovery, Aftermarket trading

JEL Classification: K2, D4, D8, L1, G2, G3

Suggested Citation

Busaba, Walid Y. and Chang, Chun, Bookbuilding Vs. Fixed Price Revisited: The Effect of Aftermarket Trading (October 30, 2009). Journal of Corporate Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1536847

Walid Y. Busaba (Contact Author)

University of Western Ontario - Ivey Business School ( email )

1255 Western RoD
London, Ontario N6G 0N1
Canada
519-661-4178 (Phone)
519-661-4184 (Fax)

HOME PAGE: http://www.ivey.uwo.ca/faculty/directory/walid-busaba/

Chun Chang

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF) ( email )

Shanghai Jiao Tong University
211 West Huaihai Road
Shanghai, 200030
China

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