RFS Advance Access originally published online on January 29, 2007
Review of Financial Studies 2007 20(4):1021-1058; doi:10.1093/revfin/hhm010
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Analyst Hype in IPOs: Explaining the Popularity of Bookbuilding
Swiss Finance Institute, University of Lugano
University of Toronto
Tuck School of Business
Address correspondence to Tuck School of Business, Dartmouth College, 100 Tuck Hall, Hanover, NH 03755, or e-mail: Kent.L.Womack{at}dartmouth.edu
JEL: G24, G32
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Abstract |
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The bookbuilding IPO procedure has captured significant market share from auction alternatives recently, despite the significantly lower costs related to the auction mechanism. In France, where both mechanisms were used in the 1990s, the ostensible advantages of bookbuilding were advertising-related benefits. Book-built issues were more likely to be followed and positively recommended by lead underwriters. Even nonunderwriters' analysts promote book-built issues more in order to curry favor with the IPO underwriter for allocations of future deals. Yet we do not observe valuation or post-IPO return differentials that suggest these types of promotion have any value to the issuing firm.
This paper was previously titled "Quid Pro Quo in IPOs: Why Book-building is Dominating Auctions." We thank Larry Ausubel, Dan Bradley, Clay Corbus, Edith Ginglinger, David Goldreich, Jacques Hamon, Bruno Husson, Bertrand Jacquillat, Aditya Kaul, Julien Le Maux, Alexander Ljungqvist, Eric Nowak, Jay Ritter, Jörg Rocholl, Ioanid Rosu, Ann Sherman, Andrei Shleifer, Jeremy Stein, Luigi Zingales, seminar participants at Université Paris Dauphine, the University of Alberta, the University of Calgary, and the University of Lausanne, and conference participants at the third EVI Conference at the Tuck School, the third EuroConference on Auctions and Market Design, the NCCR Finrisk Research Day, the third RICAFE Conference, the French Finance Association, and the American Finance Association for helpful comments. Part of this research has been carried out within the project on Corporate Finance of the National Centre of Competence in Research "Financial Valuation and Risk Management" (NCCR FINRISK). The NCCR FINRISK is a research program supported by the Swiss National Science Foundation. Degeorge and Derrien also acknowledge support from the RICAFE program (HPSE-CT-2002-00140). Jens Martin and Sébastien Michenaud provided able research assistance.
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