Building the IPO Order Book: Underpricing and Participation Limits With Costly Information / Ann E. Sherman, Sheridan Titman.

Format:

Book

Author/Creator:

Sherman, Ann E.

Contributor:

National Bureau of Economic Research.

Titman, Sheridan.

Series:

Working Paper Series (National Bureau of Economic Research) no. w7786.

NBER working paper series no. w7786

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Building the IPO Order Book

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2000.

Summary:

This paper examines the book building mechanism for marketing initial public offerings. We present a model where the underwriter selects a group of investors along with a pricing and allocation mechanism in a way that maximizes the information generated during the process of going public at a minimum cost. Unlike previous models, we take into account the moral hazard problem that is faced by investors when evaluation is costly. Our results suggest that for firms with the most to gain from accurate pricing, the number of investors participating in the offering is larger, and underpricing will be greater. When the demand for accuracy is relatively low, the expected amount of underpricing exactly offsets the investors' costs of acquiring information. However, when the demand for accuracy is high, the expected amount of underpricing can exceed the cost of information and investors can earn rents.

Notes:

Print version record

July 2000.