Quid Pro Quo in Ipos: Why Book-Building is Dominating Auctions

49 Pages Posted: 4 Aug 2004

See all articles by Francois Degeorge

Francois Degeorge

University of Lugano - Faculty of Economics; Swiss Finance Institute; European Corporate Governance Institute (ECGI)

François Derrien

HEC Paris - Finance Department

Kent L. Womack

University of Toronto - Rotman School of Management (Deceased)

Date Written: June 2004

Abstract

The book-building procedure for selling initial public offerings to investors has captured significant market share from auction alternatives in recent years, despite significantly lower costs in both direct fees and initial underpricing when using the auction mechanism. This Paper shows that in the French market, where the frequency of book-building and auctions was about equal in the 1990s, the ostensible advantages to the issuer using book-building were advertising-related quid pro quo benefits. Specifically, we find that book-built issues were more likely to be followed and positively recommended by the lead underwriters and were also more likely to receive 'booster shots' post-issuance if the shares had fallen. Even non-underwriters' analysts appear to promote book-built issues more, but only when their underwriters stood to gain from acquiring shares in future issues from the recommended firm's lead underwriter. Book-built issues also appeared to garner more press in general (but only after they had chosen book-building, not before). Yet, we do not observe valuation or return differentials to suggest these types of promotion have any value to the issuing firm. We conclude that underwriters using the book-building procedure have convinced issuers of the questionable value of advertising and promotion of their shares.

Keywords: IPOs, book-building, auctions

JEL Classification: G32

Suggested Citation

Degeorge, Francois and Derrien, François and Womack, Kent L., Quid Pro Quo in Ipos: Why Book-Building is Dominating Auctions (June 2004). CEPR Discussion Paper No. 4462. Available at SSRN: https://ssrn.com/abstract=572426

Francois Degeorge (Contact Author)

University of Lugano - Faculty of Economics ( email )

via Giuseppe Buffi 13
CH-6904 Lugano
Switzerland
41 58 666 4634 (Phone)
41 58 666 4647 (Fax)

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

François Derrien

HEC Paris - Finance Department ( email )

1 rue de la Liberation
Jouy-en-Josas Cedex, 78351
France
33 1 39 67 72 98 (Phone)

HOME PAGE: http://www.hec.fr/derrien

Kent L. Womack

University of Toronto - Rotman School of Management (Deceased)

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