Ipos and Long Term Relationships: An Advantage of Book Building
25 Pages Posted: 1 Oct 2000
Date Written: June 2000
There is a global trend in initial public offerings towards the increased use of book building, the primary US method. A key difference between book building and other methods such as auctions is that, with book building, the underwriter has total discretion in allocating shares, allowing allocations to be based on a long term relationship between the underwriter and investors. This paper extends the work of Benveniste and Spindt on the importance of a multi-period setting when analyzing book building. In a multi-period model with endogenous (and costly) information acquisition, I show that the investment bank's ability to lower underpricing depends largely on its ability to favor regular uninformed investors. Among other things, this implies that the hybrid book building/open offer IPO method which is becoming increasingly popular internationally will lead to higher underpricing than straight book building.
Keywords: Initial Public Offerings, Going Public, Book-Building, Auctions, New Issues
JEL Classification: D82, G15, G24
Suggested Citation: Suggested Citation