Building the IPO Order Book: Underpricing and Participation Limits With Costly Information

Ann Sherman and Sheridan Titman

No 7786, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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.

JEL-codes: G2 (search for similar items in EconPapers)
Date: 2000-07
Note: CF
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Published as Sherman, Ann E. and Sheridan Titman. "Building The IPO Order Book: Underpricing And Participation Limits With Costly Information," Journal of Financial Economics, 2002, v65(1,Jul), 3-29.

Downloads: (external link)
http://www.nber.org/papers/w7786.pdf (application/pdf)

Related works:
Journal Article: Building the IPO order book: underpricing and participation limits with costly information (2002)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:7786

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w7786

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().