Working Paper: CEPR ID: DP2863
Authors: Francesca Cornelli; David Goldreich
Abstract: When using a formal bookbuilding procedure, underwriters observethe demand curves of investors as stated in the ?book? prior topricing shares in an equity issue. The purpose of this Paper is toexamine whether the investment bank uses the information in thebook when setting the issue price, and whether this information canhelp predict subsequent secondary aftermarket prices. We examinethe details of the institutional bids for shares for a sample of63 international equity issues. We find that the issue price isclosely related to the limit prices submitted by bidders. Thelevel of oversubscription has a smaller but significant effect.The price primarily reflects the information in the pricecontingent bids of certain bidder types, such as large bidders andfrequent bidders. Aftermarket returns in IPOs are positivelycorrelated with oversubscription and elasticity of the demand.
Keywords: bookbuilding; equity issues; ipos
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 |
|---|---|
| Limit prices submitted by bidders (D44) | Issue price (D44) |
| Oversubscription levels (D45) | Issue price (D44) |
| Oversubscription levels (D45) | Aftermarket returns (L81) |
| Dispersion of limit prices (D41) | Aftermarket returns (L81) |