Ipos and Long Term Relationships: An Advantage of Book Building

Posted: 15 Dec 2000

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There is a global trend in initial public offerings towards the increased use of book building, the primary US method. A key difference between book building and other methods such as auctions is that, with book building, the underwriter has total discretion in allocating shares, allowing allocations to be based on a long term relationship between the underwriter and investors. This paper extends the work of Benveniste and Spindt on the importance of a multi-period setting when analyzing book building. In a multi-period model with endogenous (and costly) information acquisition, I show that the investment bank's ability to lower underpricing depends largely on its ability to favor regular uninformed investors. Among other things, this implies that the hybrid book building/open offer IPO method which is becoming increasingly popular internationally will lead to higher underpricing than straight book building.

Keywords: Initial Public Offerings, Going Public, Book Building, Auctions, New Issues

JEL Classification: D82, G15, G24

Suggested Citation

Sherman, Ann E., Ipos and Long Term Relationships: An Advantage of Book Building. Available at SSRN: https://ssrn.com/abstract=244103

Ann E. Sherman (Contact Author)

DePaul University ( email )

1 East Jackson Blvd.
Chicago, IL 60604-2287
United States
312-362-5499 (Phone)

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