How Does the Underwriter Match Allocation and Demand in IPO Bookbuilding?
50 Pages Posted: 12 May 2004
Date Written: April 29, 2004
This paper uses an original data set of 41 European IPOs brought to the market by a top-tier investment bank. It makes it possible for the first time to consider demand and allocation for institutional and retail investors simultaneously and thereby to analyze all agents at all stages of the bookbuilding process. The results in the paper suggest a quid pro quo between the underwriter and informed investors in which the latter receive favorable allocations for guaranteeing the underwriter the placement success in issues with weak demand. The paper also provides evidence for a winner's curse faced by uninformed retail investors. The underwriter has to underprice new issues on average to induce these investors to participate in IPOs. It cannot be shown that investors are compensated for revealing their information.
Keywords: IPO bookbuilding, allocation, underwriter
JEL Classification: G24, G32
Suggested Citation: Suggested Citation