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IPO underpricing during the boom: a block-booking explanation

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  • James, Kevin R.

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.

Suggested Citation

  • James, Kevin R., 2004. "IPO underpricing during the boom: a block-booking explanation," LSE Research Online Documents on Economics 24679, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:24679
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    More about this item

    Keywords

    initial public offerings; underpricing; book-building; asymmetric information; investment banking;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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