When Bookbuilding Meets IPOs

52 Pages Posted: 20 Mar 2007 Last revised: 9 Jun 2010

See all articles by Amit Bubna

Amit Bubna

Indian School of Business

Nagpurnanand Prabhala

The Johns Hopkins Carey Business School

Date Written: September 6, 2007

Abstract

Bookbuilding, the dominant offering mechanism for IPOs in the U.S. and other markets, is controversial because of the power it gives underwriters over IPO allocations. Critics point to the fact that allocations could be abused to generate kickbacks for underwriters while proponents argue that allocation power could improve pre-market price discovery. We examine the effect of varying underwriter power over IPO allocations in the Indian IPO market, exploiting its natural variation due to regulatory changes. When underwriters control allocations, bookbuilding is associated with lesser underpricing, but this effect quickly dissipates when regulations bar allocation discrimination. Using a proprietary dataset of IPO books, we find that allocation discrimination is pervasive, economically significant, and is used to differentiate between institutional investors based on hard information in bids, issue and bidder characteristics and soft information possessed by underwriters. Our evidence supports bookbuilding theories in which discretion in allocation helps in pre-market price discovery.

Keywords: IPOs, bookbuilding, underpricing

JEL Classification: G30, G20, G24

Suggested Citation

Bubna, Amit and Prabhala, Nagpurnanand, When Bookbuilding Meets IPOs (September 6, 2007). Available at SSRN: https://ssrn.com/abstract=972757 or http://dx.doi.org/10.2139/ssrn.972757

Amit Bubna (Contact Author)

Indian School of Business ( email )

Hyderabad, Gachibowli 500 019
India

Nagpurnanand Prabhala

The Johns Hopkins Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States
+1 410 234 4532 (Phone)

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