IPO underpricing during the boom: a block-booking explanation

Kevin R. James

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: A bank can efficiently underwrite individually difficult to value IPOs by offering them as a package deal to a stable coalition of investors (block-booking). Block-booking banks set offer prices to equalize downside risk across their offerings, not expected returns. Examining US IPOs over the 1986 to 2003 period, I find that this is so. Given the return distribution on non-tech IPOs during non-boom years, equalizing downside risk implies that the average initial return on tech/boom IPOs equals 48% (actual value: 46%). The block-booking theory accounts for both the direction and magnitude of differences in average initial returns across IPO types.

Keywords: initial public offerings; underpricing; book-building; asymmetric information; investment banking (search for similar items in EconPapers)
JEL-codes: D82 G18 G24 G32 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2004-02
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:24679

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