Bookbuilding: How Informative is the Order Book

Abstract

When using a formal bookbuilding procedure, underwriters observe the demand curves of investors as stated in the "book" prior to pricing shares in an equity issue. The purpose of this paper is to examine whether the investment bank uses the information in the book when setting the issue price and whether this information can help predict subsequent secondary aftermarket prices. We examine the details of the institutional bids for shares for a sample of 63 international equity issues. We find that the issue price is closely related to the limit prices submitted by bidders. The level of oversubscription has a smaller but significant effect. The price primarily reflects the information in the price contingent bids of certain bidders such as large bidders and frequent bidders. Aftermarket returns in IPOs are positively correlated with oversubscription and elasticity of the demand.