Working Paper: CEPR ID: DP2160
Authors: Francesca Cornelli; David Goldreich
Abstract: Under the bookbuilding procedure, an investment banker solicits bids for shares from institutional investors prior to pricing the issue. After collecting this demand information, the investment banker prices the issue and allocates shares to the investors. We examine the books from 39 international equity issues. For each issue we consider all institutional bids and the corresponding allocations. We infer some of the criteria the investment banker uses to allocate shares. We find that the investment banker awards more shares to bidders that provide information (such as a limit price in their bids). In addition, regular investors receive more favorable allocations - especially when the issue is heavily oversubscribed. The results support the winner's curse theories and the justifications for the use of bookbuilding.
Keywords: bookbuilding; IPO; winners curse
JEL Codes: G24; G30; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| bidders who provide limit prices (D44) | receive more shares (G34) |
| oversubscription (D45) | more favorable allocations (D61) |
| informed bidders (D44) | select underpriced issues (G12) |
| infrequent limit bidders (D44) | higher returns (G12) |
| bookbuilding process (D44) | reduce winners curse (D44) |
| early limit bids (D44) | investment bank favors (G24) |
| large orders (C69) | treated preferentially (C24) |