Advanced Search
MyIDEAS: Login

Issue Cost and Method of IPO Underwriting: Japan's Change from Auction Method Pricing to Book Building

Contents:

Author Info

  • Kenji Kutsuna

    (Osaka City University)

  • Richard L. Smith

    (Drucker Graduate School of Management, Claremont Graduate University)

Abstract

In 1997, Japan introduced book building an alternative to an auction method of IPO pricing that had been required since 1989. Shortly after its authorization, all IPOs in Japan were priced by book building. The shift occurred despite economic arguments and evidence suggesting that the auction method reduced underpricing. We attribute the shift to creation of an information-based pooling equilibrium where low quality firms that benefit from the imposed auction regime lose the benefit if high quality firms are free to select book building. We examine the effects of the regime change on total issue cost and characteristics of IPO firms. We find that, on average, total issue cost during the auction period would have been similar under book building, but that the regimes have differential effects. For large well-established issuers, book building reduced total issue cost. Small issuers had lower cost under the auction method, but high-quality small firms appear to have been foreclosed from issuing. Ignoring the effect of pricing method on underinvestment, our estimates of the simple average cost advantage of the auction method range from 6.9 percent of aftermarket value to –1.8 percent. Because, from a cost standpoint, book building benefits large issuers, the value-weighted effect of the book building method is unambiguously positive, averaging 136 million Yen per issuer in our sample, or 3.5 percent of aftermarket value. In aggregate, we estimate that reliance on the auction method from 1995 through late 1997 cost JASDAQ issuers 61 billion Yen more than book building would have cost. This estimate does not include any additional costs associated with underinvestment.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.claremontmckenna.edu/rdschool/papers/2000-35.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Claremont Colleges in its series Claremont Colleges Working Papers with number 2000-35.

as in new window
Length:
Date of creation:
Date of revision:
Handle: RePEc:clm:clmeco:2000-35

Contact details of provider:
Postal: 500 E. 9th Street, Claremont, CA 91711
Phone: (909) 607-3041
Fax: (909) 621-8249
Web page: http://www.claremontmckenna.edu/rdschool/papers/
More information through EDIRC

Related research

Keywords:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Benveniste, Lawrence M. & Spindt, Paul A., 1989. "How investment bankers determine the offer price and allocation of new issues," Journal of Financial Economics, Elsevier, vol. 24(2), pages 343-361.
  2. Yasushi Hamao & Frank Packer & Jay R. Ritter, 1998. "Institutional affiliation and the role of venture capital: evidence from initial public offerings in Japan," Staff Reports 52, Federal Reserve Bank of New York.
  3. Baron, David P & Holmstrom, Bengt, 1980. " The Investment Banking Contract for New Issues under Asymmetric Information: Delegation and the Incentive Problem," Journal of Finance, American Finance Association, vol. 35(5), pages 1115-38, December.
  4. Ronald M. Giammarino, Tracy Lewis, 1988. "A Theory of Negotiated Equity Financing," Review of Financial Studies, Society for Financial Studies, vol. 1(3), pages 265-288.
  5. Lin, Timothy H. & Smith, Richard L., 1998. "Insider reputation and selling decisions: the unwinding of venture capital investments during equity IPOs," Journal of Corporate Finance, Elsevier, vol. 4(3), pages 241-263, September.
  6. Loughran, Tim & Ritter, Jay R. & Rydqvist, Kristian, 1994. "Initial public offerings: International insights," Pacific-Basin Finance Journal, Elsevier, vol. 2(2-3), pages 165-199, May.
  7. Beatty, Randolph P. & Ritter, Jay R., 1986. "Investment banking, reputation, and the underpricing of initial public offerings," Journal of Financial Economics, Elsevier, vol. 15(1-2), pages 213-232.
  8. Allen, Franklin & Faulhaber, Gerald R., 1989. "Signalling by underpricing in the IPO market," Journal of Financial Economics, Elsevier, vol. 23(2), pages 303-323, August.
  9. Pettway, Richard H. & Kaneko, Takashi, 1996. "The effects of removing price limits and introducing auctions upon short-term IPO returns: The case of Japanese IPOs," Pacific-Basin Finance Journal, Elsevier, vol. 4(2-3), pages 241-258, July.
  10. Carter, Richard B & Manaster, Steven, 1990. " Initial Public Offerings and Underwriter Reputation," Journal of Finance, American Finance Association, vol. 45(4), pages 1045-67, September.
  11. Megginson, William L & Weiss, Kathleen A, 1991. " Venture Capitalist Certification in Initial Public Offerings," Journal of Finance, American Finance Association, vol. 46(3), pages 879-903, July.
  12. Rock, Kevin, 1986. "Why new issues are underpriced," Journal of Financial Economics, Elsevier, vol. 15(1-2), pages 187-212.
  13. Smith, Richard L, 1987. " The Choice of Issuance Procedure and the Cost of Competitive and Negotiated Underwriting: An Examination of the Impact of Rule 50," Journal of Finance, American Finance Association, vol. 42(3), pages 703-20, July.
  14. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
  15. Kenji Kutsuna & Marc Cowling & Paul Westhead, 2000. "The short-run performance of JASDAQ companies and venture capital involvement before and after flotation," Venture Capital, Taylor & Francis Journals, vol. 2(1), pages 1-25, January.
  16. Carow, Kenneth A, 1999. "Underwriting Spreads and Reputational Capital: An Analysis of New Corporate Securities," Journal of Financial Research, Southern Finance Association & Southwestern Finance Association, vol. 22(1), pages 15-28, Spring.
  17. Booth, James R. & Smith, Richard II, 1986. "Capital raising, underwriting and the certification hypothesis," Journal of Financial Economics, Elsevier, vol. 15(1-2), pages 261-281.
  18. Tinic, Seha M, 1988. " Anatomy of Initial Public Offerings of Common Stock," Journal of Finance, American Finance Association, vol. 43(4), pages 789-822, September.
  19. Hanley, Kathleen Weiss, 1993. "The underpricing of initial public offerings and the partial adjustment phenomenon," Journal of Financial Economics, Elsevier, vol. 34(2), pages 231-250, October.
  20. repec:wop:humbsf:2000-72 is not listed on IDEAS
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Antonio Acconcia & Alfredo Del Monte & Luca Pennacchio, 2011. "Underpricing and Firm’s Distance from Financial Centre: Evidence from three European Countries," CSEF Working Papers 295, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  2. Guray Kucukkocaoglu & Ozge Sezgin Alp, 2012. "IPO mechanism selection by using Classification and Regression Trees," Quality & Quantity: International Journal of Methodology, Springer, vol. 46(3), pages 873-888, April.
  3. Guray Kucukkocaoglu, 2007. "Underpricing in Turkey: Comparison of the IPO Methods," Money Macro and Finance (MMF) Research Group Conference 2006 8, Money Macro and Finance Research Group.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:clm:clmeco:2000-35. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.