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Bookbuilding: How Informative is the Order Book?

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  • Cornelli, Francesca
  • Goldreich, David
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    Abstract

    When using a formal bookbuilding procedure, underwriters observe the demand curves of investors as stated in the ‘book’ prior to pricing shares in an equity issue. The purpose of this Paper is to examine whether the investment bank uses the information in the book when setting the issue price, and whether this information can help predict subsequent secondary aftermarket prices. We examine the details of the institutional bids for shares for a sample of 63 international equity issues. We find that the issue price is closely related to the limit prices submitted by bidders. The level of oversubscription has a smaller but significant effect. The price primarily reflects the information in the price contingent bids of certain bidder types, such as large bidders and frequent bidders. Aftermarket returns in IPOs are positively correlated with oversubscription and elasticity of the demand.

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    Bibliographic Info

    Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2863.

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    Date of creation: Jun 2001
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    Handle: RePEc:cpr:ceprdp:2863

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    Related research

    Keywords: bookbuilding; Equity Issues; IPOs;

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    References

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    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.:
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    1. Nagpurnanand Prabhala & Manju Puri, 1998. "How Does Underwriter Price Support Affect IPOs? Empirical Evidence," Yale School of Management Working Papers ysm91, Yale School of Management, revised 01 Jul 2000.
    2. Alexander Ljungqvist & Tim Jenkinson & William Wilhelm, 2001. "Global Integration in Primary Equity Markets: The Role of U.S. Banks and U.S. Investors," OFRC Working Papers Series 2001fe06, Oxford Financial Research Centre.
    3. Katrina Ellis & Roni Michaely & Maureen O'Hara, 2000. "When the Underwriter Is the Market Maker: An Examination of Trading in the IPO Aftermarket," Journal of Finance, American Finance Association, vol. 55(3), pages 1039-1074, 06.
    4. Kandel, Shmuel & Sarig, Oded & Wohl, Avi, 1999. "The Demand for Stocks: An Analysis of IPO Auctions," Review of Financial Studies, Society for Financial Studies, vol. 12(2), pages 227-47.
    5. Spatt, Chester & Srivastava, Sanjay, 1991. "Preplay Communication, Participation Restrictions, and Efficiency in Initial Public Offerings," Review of Financial Studies, Society for Financial Studies, vol. 4(4), pages 709-26.
    6. Michelle Lowry & G. William Schwert, 2001. "Biases in the IPO Pricing Process," NBER Working Papers 8586, National Bureau of Economic Research, Inc.
    7. Smith, Clifford Jr., 1977. "Alternative methods for raising capital : Rights versus underwritten offerings," Journal of Financial Economics, Elsevier, vol. 5(3), pages 273-307, December.
    8. Roger G. Ibbotson & Jody L. Sindelar & Jay R Ritter, 1994. "The Market'S Problems With The Pricing Of Initial Public Offerings," Journal of Applied Corporate Finance, Morgan Stanley, vol. 7(1), pages 66-74.
    9. 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.
    10. Parsons, John E. & Raviv, Artur, 1985. "Underpricing of seasoned issues," Journal of Financial Economics, Elsevier, vol. 14(3), pages 377-397, September.
    11. Laurie Krigman & Wayne H. Shaw & Kent L. Womack, 1999. "The Persistence of IPO Mispricing and the Predictive Power of Flipping," Journal of Finance, American Finance Association, vol. 54(3), pages 1015-1044, 06.
    12. 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.
    13. Francesca Cornelli, 2001. "Bookbuilding and Strategic Allocation," Journal of Finance, American Finance Association, vol. 56(6), pages 2337-2369, December.
    14. Tim Loughran & Jay R. Ritter, 2002. "Why Don't Issuers Get Upset About Leaving Money on the Table in IPOs?," Review of Financial Studies, Society for Financial Studies, vol. 15(2), pages 413-444, March.
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    Cited by:
    1. Michelle Lowry & G. William Schwert, 2001. "Biases in the IPO Pricing Process," NBER Working Papers 8586, National Bureau of Economic Research, Inc.
    2. Lowry, Michelle & Schwert, G. William, 2004. "Is the IPO pricing process efficient?," Journal of Financial Economics, Elsevier, vol. 71(1), pages 3-26, January.

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