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

47 Pages Posted: 25 Feb 2010

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: February 25, 2010

Abstract

The distinct regulatory design of Indian IPOs permits an empirical evaluation of IPO underpricing models against those that model IPO initial returns as a consequence of overpricing. Characteristics of the Indian bookbuilding process allow us to study the timing and subscription patterns of different investor groups and to dissect IPO returns into two distinct components: one relating to pre-listing underpricing set by the underwriter and the other to the initial return from first day’s trade in the post-listing period. We find that a transparent bookbuilding process can alleviate the winner’s curse problem for retail investors but that does not eliminate IPO initial returns. Further, IPO initial returns persist but do not increase even if investment bankers are stripped of their discretionary allocation power. These results are not supportive of the Rock (1986) and Benevineste and Spindt (1989) voluntary underpricing models. We find that the unmet demand of non-institutional investor groups is the primary driver of the IPO initial return 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 (February 25, 2010). Available at SSRN: https://ssrn.com/abstract=1559185 or http://dx.doi.org/10.2139/ssrn.1559185

Arif Khurshed (Contact Author)

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

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Alok Pande

Government of India ( email )

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

Bannerghatta Road
Bangalore, Karnataka 560076
India

Ajai K. Singh

Department of Finance, University of Central Florida ( email )

College of Business Administration
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Orlando, FL 32816
United States
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407-823-6676 (Fax)

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