Bookbuilding: How Informative Is the Order Book?

Authors

  • Francesca Cornelli,

  • David Goldreich

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    • Cornelli and Goldreich are at the London Business School and the Centre for Economic Policy Research. We are grateful to Ulf Axelson, Alon Brav, Ian Cooper, Espen Eckbo, Leonardo Felli, Mike Fishman, Julian Franks, Rick Green (the editor), Denis Gromb, Arif Khurshed, Alexander Ljungqvist, Ron Masulis, Kristian Rydqvist, Ingrid Werner, Bill Wilhelm, and an anonymous referee for helpful comments, and to seminar participants at City University (London), Hebrew University, London Business School, McGill University, Ohio State University, Tel Aviv University, University of Georgia, University of Toulouse, the 2000 ABN-AMRO International Conference on IPOs in Amsterdam, the 2000 CEPR Finance Symposium in Gerzensee, the 2000 European Finance Association Meetings, the 2000 “Primary Equity Markets” conference in Capri, the 2001 American Finance Association meetings, the 2001 Texas Finance Festival, and the 2001 Utah Winter Finance Conference. We thank Sebastian de Ramon, Burcin Kasapoglu, and Purnendu Nath for excellent research assistance. Any errors are our own. The project was supported by an LBS Research Grant.

ABSTRACT

We examine the institutional bids submitted under the bookbuilding procedure for a sample of international equity issues. We find that information in bids which include a limit price, especially those of large and frequent bidders, affects the issue price. Oversubscription has a smaller but significant effect for IPOs. Public information affects the issue price to the extent that it is reflected in the bids. Oversubscription and demand elasticity are positively correlated with the first-day aftermarket return, and demand elasticity is negatively correlated with aftermarket volatility. Our results support the view that bookbuilding is designed to extract information from investors.

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