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Bookbuilding vs. fixed price revisited: The effect of aftermarket trading

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  • Busaba, Walid Y.
  • Chang, Chun

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.

Suggested Citation

  • Busaba, Walid Y. & Chang, Chun, 2010. "Bookbuilding vs. fixed price revisited: The effect of aftermarket trading," Journal of Corporate Finance, Elsevier, vol. 16(3), pages 370-381, June.
  • Handle: RePEc:eee:corfin:v:16:y:2010:i:3:p:370-381
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Autore, Don M. & Boulton, Thomas J. & Smart, Scott B. & Zutter, Chad J., 2014. "The impact of institutional quality on initial public offerings," Journal of Economics and Business, Elsevier, vol. 73(C), pages 65-96.
    2. repec:eee:jfinin:v:32:y:2017:i:c:p:60-75 is not listed on IDEAS
    3. Low, Soo-Wah & Yong, Othman, 2011. "Explaining over-subscription in fixed-price IPOs -- Evidence from the Malaysian stock market," Emerging Markets Review, Elsevier, vol. 12(3), pages 205-216, September.
    4. Vdovychenko, Artem, 2012. "Динамика Ликвидности На Рынке Первичных Публичных Размещений
      [Liquidity dynamics on initial public offerings market]
      ," MPRA Paper 69428, University Library of Munich, Germany.

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