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Bookbuilding vs. Fixed Price: An Analysis of Competing Strategies for Marketing IPOs

Published online by Cambridge University Press:  06 April 2009

Lawrence M. Benveniste  and
Walid Y. Busaba
Lawrence M. Benveniste
Affiliation:
Finance Department, Carlson School of Management, University of Minnesota, Minneapolis, MN 55455
Walid Y. Busaba
Affiliation:
Finance Department, College of Business and Public Administration, University of Arizona, Tucson, AZ 85721
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Abstract

We compare two mechanisms for selling IPOs, the fixed price method and American book-building, when investors have correlated information and can observe each other's subscription decisions. In this environment, the fixed price method is a strategy that can create cascading demand. Alternatively, an underwriter building a book aggregates investor information into the offer price. We find that bookbuilding generates higher expected proceeds but exposes the issuer to greater uncertainty, and that it provides the option to sell additional shares that are not underpriced on the margin.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 32 , Issue 4 , December 1997 , pp. 383 - 403
Copyright
Copyright © School of Business Administration, University of Washington 1997

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