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The choice between bookbuilding and fixed-price offering: Evidence from SEOs in Taiwan

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  • Chen, Hsuan-Chi
  • Shu, Pei-Gi
  • Chiang, Sue-Jane

Abstract

As bookbuilding is less costly in terms of underpricing and has become the dominant underwriting method in initial public offerings (IPOs) (see Sherman, 2005), we examine whether the pattern still holds in seasoned equity offerings (SEOs) and find that only 15% (93 out of 610 sample firms) of SEO issuers in Taiwan selected the bookbuilding method. Among the fixed-price offerings, 84% of issuers would have had lower total issue costs in terms of the sum of gross spread and SEO underpricing, if the bookbuilding procedure was selected instead. It raises a question: Why do most SEO issuers in Taiwan prefer the costly fixed-price offer to the bookbuilding offer? Extending Barry (1989), we propose a measure of wealth loss to the existing shareholders to analyze this question. After considering the effect resulting from the pre-emption rights held by the existing shareholders, we find that the average wealth loss of fixed-price offerings is less than that of the bookbuilding offerings. That is, most SEO issuers are rational in choosing between the two underwriting mechanisms based on the expected wealth loss.

Suggested Citation

  • Chen, Hsuan-Chi & Shu, Pei-Gi & Chiang, Sue-Jane, 2011. "The choice between bookbuilding and fixed-price offering: Evidence from SEOs in Taiwan," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 21(1), pages 28-48, February.
    • Handle: RePEc:eee:intfin:v:21:y:2011:i:1:p:28-48
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    Cited by:

    1. Hanafi, Mamduh M., 2021. "Fixed price and book building methods in an exogenous environment: Evidence from Indonesia stock market," Research in International Business and Finance, Elsevier, vol. 58(C).
    2. Shu, Pei-Gi & Chiang, Sue-Jane, 2014. "Firm size, timing, and earnings management of seasoned equity offerings," International Review of Economics & Finance, Elsevier, vol. 29(C), pages 177-194.
    3. Simon Gao & Tony Chieh-Tse Hou, 2019. "An Empirical Examination of IPO Underpricing Between High-technology and Non-high-technology Firms in Taiwan," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 18(1), pages 23-51, April.
    4. Chao, Ching-Hsiang & Huang, Chih-Jen, 2022. "Firm performance following actual share repurchases: Effects of investment crowding out and financial flexibility," Pacific-Basin Finance Journal, Elsevier, vol. 73(C).

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