IPOs and Long-Term Relationships: An Advantage of Book Building
- 1 July 2000
- journal article
- research article
- Published by Oxford University Press (OUP) in The Review of Financial Studies
- Vol. 13 (3), 697-714
- https://doi.org/10.1093/rfs/13.3.697
Abstract
There is a global trend in initial public offerings toward the increased use of book building. Relative to other methods such as auctions, a key feature of book building is that the underwriter has total discretion in allocating shares, allowing allocations to be based on long-term relationships between underwriters and investors. In a multiperiod model with endogenous (and costly) information acquisition. I show that the underwriter's ability to lower underpricing depends largely on its ability to favor regular uninformed investors. One implication is that the hybrid book building/open offer method, which is becoming increasingly popular internationally, will lead to higher underpricing than straight book building.Keywords
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