Business Publications
Document Type
Article
Publication Date
6-2010
Volume
16
Issue
3
Journal
Journal of Corporate Finance
URL with Digital Object Identifier
https://doi.org/10.1016/j.jcorpfin.2009.11.001
Abstract
Investors who possess information about the value of an IPO can participate in the offering as well as trade strategically in the aftermarket. Both the bookbuilding and the fixed price IPO selling methods require more underpricing when aftermarket trading by informed investors is considered. Bookbuilding becomes especially costly, since the potential for profit in the aftermarket adversely affects investors‘ bidding behavior in the premarket. Unless the underwriter can restrict its bookbuilding effort to a small enough subset of the informed investors, a fixed price strategy that allocates the issue to retail investors produces higher proceeds on average, contrary to the conventional wisdom in the literature. We therefore find a benefit to limiting access to the premarket and, hence, provide an efficiency rationale for the practice by American bankers of marketing IPOs to a select group of investors. We also provide unique policy and empirical implications.
Notes
A revised version of the paper is forthcoming in the Journal of Corporate Finance. For access to that version and for citations, please refer to the paper‘s digital object identifier doi:10.1016/j.jcorpfin.2009.11.001.