Advanced Search
MyIDEAS: Login to save this paper or follow this series

Building the IPO Order Book: Underpricing and Participation Limits With Costly Information

Contents:

Author Info

  • Ann E. Sherman
  • Sheridan Titman

Abstract

This paper examines the book building mechanism for marketing initial public offerings. We present a model where the underwriter selects a group of investors along with a pricing and allocation mechanism in a way that maximizes the information generated during the process of going public at a minimum cost. Unlike previous models, we take into account the moral hazard problem that is faced by investors when evaluation is costly. Our results suggest that for firms with the most to gain from accurate pricing, the number of investors participating in the offering is larger, and underpricing will be greater. When the demand for accuracy is relatively low, the expected amount of underpricing exactly offsets the investors' costs of acquiring information. However, when the demand for accuracy is high, the expected amount of underpricing can exceed the cost of information and investors can earn rents.

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.nber.org/papers/w7786.pdf
Download Restriction: no

Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7786.

as in new window
Length:
Date of creation: Jul 2000
Date of revision:
Publication status: published as Sherman, Ann E. and Sheridan Titman. "Building The IPO Order Book: Underpricing And Participation Limits With Costly Information," Journal of Financial Economics, 2002, v65(1,Jul), 3-29.
Handle: RePEc:nbr:nberwo:7786

Note: CF
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Phone: 617-868-3900
Email:
Web page: http://www.nber.org
More information through EDIRC

Related research

Keywords:

Other versions of this item:

Find related papers by JEL classification:

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. Habib, Michel A & Ljungqvist, Alexander P, 2001. "Underpricing and Entrepreneurial Wealth Losses in IPOs: Theory and Evidence," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 14(2), pages 433-58.
  2. Hsuan-Chi Chen & Jay R. Ritter, 2000. "The Seven Percent Solution," Journal of Finance, American Finance Association, American Finance Association, vol. 55(3), pages 1105-1131, 06.
  3. Tim Jenkinson & William Wilhelm & Alexander Ljungqvist, 2000. "Has the introduction of bookbuilding increased the efficiency of international IPOs?," OFRC Working Papers Series, Oxford Financial Research Centre 2000fe04, Oxford Financial Research Centre.
  4. Mello, Antonio S. & Parsons, John E., 1998. "Going public and the ownership structure of the firm," Journal of Financial Economics, Elsevier, Elsevier, vol. 49(1), pages 79-109, July.
  5. Benveniste, Lawrence M. & Spindt, Paul A., 1989. "How investment bankers determine the offer price and allocation of new issues," Journal of Financial Economics, Elsevier, Elsevier, vol. 24(2), pages 343-361.
  6. Stoughton, Neal M & Wong, Kit Pong & Zechner, Josef, 2001. "IPOs and Product Quality," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 74(3), pages 375-408, July.
  7. Avanidhar Subrahmanyam, 2001. "Feedback from Stock Prices to Cash Flows," Journal of Finance, American Finance Association, American Finance Association, vol. 56(6), pages 2389-2413, December.
  8. Loughran, Tim & Ritter, Jay R. & Rydqvist, Kristian, 1995. "Initial public offerings: International insights," Pacific-Basin Finance Journal, Elsevier, Elsevier, vol. 3(1), pages 139-140, May.
  9. Sherman, Ann E, 2000. "IPOs and Long-Term Relationships: An Advantage of Book Building," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 13(3), pages 697-714.
  10. William Wilhelm & Alexander Ljungqvist, 2001. "IPO Allocations: Discriminatory or Discretionary?," Economics Series Working Papers 2001-FE-08, University of Oxford, Department of Economics.
  11. Randolph P. Beatty & Jay R. Ritter, . "Investment Banking, Reputation and the Underpricing of Initial Public Offerings," Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research 2-85, Wharton School Rodney L. White Center for Financial Research.
  12. Titman, Sheridan & Trueman, Brett, 1986. "Information quality and the valuation of new issues," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 8(2), pages 159-172, June.
  13. Cornelli, Francesca & Goldreich, David, 1999. "Bookbuilding and Strategic Allocation," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2160, C.E.P.R. Discussion Papers.
  14. Tim Jenkinson & William Wilhelm, 2001. "Global Integration in Primary Equity Markets: The Role of U.S. Banks and U.S. Investors," Economics Series Working Papers 2001-FE-06, University of Oxford, Department of Economics.
  15. Chowdhry, Bhagwan & Sherman, Ann, 1996. "International differences in oversubscription and underpricing of IPOs," Journal of Corporate Finance, Elsevier, Elsevier, vol. 2(4), pages 359-381, July.
  16. Francesca Cornelli, 2001. "Bookbuilding and Strategic Allocation," Journal of Finance, American Finance Association, American Finance Association, vol. 56(6), pages 2337-2369, December.
  17. Chowdhry, Bhagwan & Sherman, Ann, 1996. "The winner's curse and international methods of allocating initial public offerings," Pacific-Basin Finance Journal, Elsevier, Elsevier, vol. 4(1), pages 15-30, May.
  18. Sherman, Ann Guenther, 1992. " The Pricing of Best Efforts New Issues," Journal of Finance, American Finance Association, American Finance Association, vol. 47(2), pages 781-90, June.
  19. Avanidhar Subrahmanyam & Sheridan Titman, 1999. "The Going-Public Decision and the Development of Financial Markets," Journal of Finance, American Finance Association, American Finance Association, vol. 54(3), pages 1045-1082, 06.
  20. Hanley, Kathleen Weiss, 1993. "The underpricing of initial public offerings and the partial adjustment phenomenon," Journal of Financial Economics, Elsevier, Elsevier, vol. 34(2), pages 231-250, October.
  21. Hanley, Kathleen Weiss & Wilhelm Jr., William J., 1995. "Evidence on the strategic allocation of initial public offerings," Journal of Financial Economics, Elsevier, Elsevier, vol. 37(2), pages 239-257, February.
  22. Stoughton, Neal M. & Zechner, Josef, 1998. "IPO-mechanisms, monitoring and ownership structure," Journal of Financial Economics, Elsevier, Elsevier, vol. 49(1), pages 45-77, July.
  23. Rock, Kevin, 1986. "Why new issues are underpriced," Journal of Financial Economics, Elsevier, Elsevier, vol. 15(1-2), pages 187-212.
  24. 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, American Finance Association, vol. 54(3), pages 1015-1044, 06.
  25. Benveniste, Lawrence M. & Busaba, Walid Y. & Wilhelm, William Jr., 2002. "Information Externalities and the Role of Underwriters in Primary Equity Markets," Journal of Financial Intermediation, Elsevier, Elsevier, vol. 11(1), pages 61-86, January.
  26. Benveniste, Lawrence M. & Busaba, Walid Y., 1997. "Bookbuilding vs. Fixed Price: An Analysis of Competing Strategies for Marketing IPOs," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 32(04), pages 383-403, December.
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:
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.

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:nbr:nberwo:7786. 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.