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Rev Fin 2000; 13:697-714
© 2000 the Society for Financial Studies

Article

IPOs and long-term relationships: an advantage of book building

AE Sherman
University of Minnesota and University of Notre Dame USA
Correspondence to: Department of Finance, University of Minnesota, 321 19th Avenue S, Room 3-122, Minneapolis, MN 55455, USA
e-mail: asherman@csom.umn.edu

Abstract

There is a global trend in initial public offerings toward the increased use of book building. Relative to other methods such as auctions, a key feature of book building is that the underwriter has total discretion in allocating shares, allowing allocations to be based on long-term relationships between underwriters and investors. In a multiperiod model with endogenous (and costly) information acquisition. I show that the underwriter's ability to lower underpricing depends largely on its ability to favor regular uninformed investors. One implication is that the hybrid book building/open offer method, which is becoming increasingly popular internationally, will lead to higher underpricing than straight book building.


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