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Block-Booking and IPO Share Allocation: The Importance of Being Ignorant

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  • Céline Gondat-Larralde
  • Kevin James

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Abstract

Given the opportunity to buy IPO shares of uncertain value at a fixed price, potentially informed investors have an incentive to refuse to participate in offerings the underwriter happens to overprice. We show that an underwriter can efficiently resolve this problem by entering into a repeat game with a stable coalition of investors who agree to participate in all of the bank's IPOs (block-booking). Using a unique data-set consisting of UK transaction records that enables us to identify original investors for all large UK IPOs between 1997 and 2000, we find strong empirical support for this implication.Céline Gondat-Larralde is at G.R.A.P.E, Université Montesquieu-Bordeaux IV, and Kevin James is a Visiting Fellow at the Financial Markets Group, London School of Economics.

Suggested Citation

  • Céline Gondat-Larralde & Kevin James, 2004. "Block-Booking and IPO Share Allocation: The Importance of Being Ignorant," FMG Discussion Papers dp480, Financial Markets Group.
  • Handle: RePEc:fmg:fmgdps:dp480
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    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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