Price Discovery Vs Fixed Ipo

Price discovery vs fixed ipo

Price discovery vs fixed ipo

Bookbuilding Vs. Fixed Price Revisited: The Effect of Aftermarket Trading

45 PagesPosted: 15 Jan 2010Last revised: 7 Sep 2012

There are 2 versions of this paper

Date Written: October 30, 2009

Abstract

Investors who possess information about the value of an IPO can participate in the offering as well as trade strategically in the aftermarket.

Price Discovery

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.

Price discovery vs fixed ipo

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.

Price discovery vs fixed ipo

Keywords: Initial public offerings, Bookbuilding, Fixed price, Price discovery, Aftermarket trading

JEL Classification: K2, D4, D8, L1, G2, G3

Suggested Citation:Suggested Citation

Busaba, Walid Y. and Chang, Chun, Bookbuilding Vs. Fixed Price Revisited: The Effect of Aftermarket Trading (October 30, 2009).

Price discovery vs fixed ipo

Journal of Corporate Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1536847