Working Paper: CEPR ID: DP4462
Authors: Francois Degeorge; Francois Derrien; Kent L. Womack
Abstract: The book-building procedure for selling initial public offerings to investors has captured significant market share from auction alternatives in recent years, despite significantly lower costs in both direct fees and initial underpricing when using the auction mechanism. This Paper shows that in the French market, where the frequency of book-building and auctions was about equal in the 1990s, the ostensible advantages to the issuer using book-building were advertising-related quid pro quo benefits. Specifically, we find that book-built issues were more likely to be followed and positively recommended by the lead underwriters and were also more likely to receive ?booster shots? post-issuance if the shares had fallen. Even non-underwriters? analysts appear to promote book-built issues more, but only when their underwriters stood to gain from acquiring shares in future issues from the recommended firm?s lead underwriter. Book-built issues also appeared to garner more press in general (but only after they had chosen book-building, not before). Yet, we do not observe valuation or return differentials to suggest these types of promotion have any value to the issuing firm. We conclude that underwriters using the book-building procedure have convinced issuers of the questionable value of advertising and promotion of their shares.
Keywords: auctions; book building; IPOs
JEL Codes: G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Corporate issuers prefer bookbuilding over auctions due to a quid pro quo relationship with underwriters (G24) | More favorable analyst coverage (G24) |
| Lead underwriters of bookbuilt IPOs provide more favorable analyst coverage (G24) | More favorable recommendations than auctioned IPOs (G24) |
| Lead analysts give 'booster shots' for bookbuilt IPOs (G24) | Positive recommendations following poor stock performance (G34) |
| Unaffiliated analysts issue positive recommendations for bookbuilt IPOs when the lead underwriter is about to take another company public (G24) | Strategic alignment between analysts and underwriters (G24) |
| Bookbuilt IPOs receive more press coverage after the offering (G24) | Better long-term performance compared to auctioned IPOs (G24) |