Bookbuilding vs. fixed price revisited: The effect of aftermarket trading |
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| Authors: | Walid Y Busaba Chun Chang |
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| Institution: | 1. Department of Business Management, National Sun Yat-Sen University, 70, Lianhai Rd., Kaohsiung 804, Taiwan;2. Department of Finance, National University of Kaohsiung, 700, Kaohsiung University Rd., Kaohsiung 811, Taiwan;3. University of the West, 1409 N. Walnut Grove Ave., Rosemead, CA 91770, USA;1. Dongguk Business School, Dongguk University, 3-26 Pil-dong, Chung-gu, Seoul 100-715, Republic of Korea;2. College of Business, Ferris State University, Big Rapids, MI 49307, USA;3. 2E Calvin Hall, College of Business Administration, Kansas State University, Manhattan, KS 66506, USA;4. College of Business Administration, Kent State University, Kent, OH 44242, USA;1. Department of Finance, National University of Kaohsiung, Kaohsiung 811, Taiwan;2. Department of Business Management, National Sun Yat-Sen University, Kaohsiung 80424, Taiwan |
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| 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. |
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