Auctions vs. Book-building and the Control of Underpricing in Hot IPO Markets

F. DERRIEN, K. Womack

Review of Financial Studies

printemps 2003, vol. 16, n°1, pp.31-61

Départements : Finance, GREGHEC (CNRS)

Market returns before the offer price is set affect the amount and variability of initial public offering (IPO) underpricing. Thus, an important question is 'what IPO procedure is best adapted for controlling underpricing in 'hot' versus 'cold' market conditions?' The French stock market offers a unique arena for empirical research on this topic, since three substantially different issuing mechanisms (auctions, bookbuilding, and fixed price) are used there. Using 1992-1998 data, we find that the auction mechanism is associated with less underpricing and lower variance of underpricing. We show that the auction procedure's ability to incorporate more information from recent market conditions into the IPO price is an important reasonKeywords Plus: INITIAL PUBLIC OFFERINGS; OWNERSHIP; ISSUES; PRICE