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IPO Underpricing During the Boom: A Block-Booking Explanation

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  • Kevin James

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 down side 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.Kevin James is a Visiting Fellow at the Financial Markets Group, London School of Economics

Suggested Citation

  • Kevin James, 2004. "IPO Underpricing During the Boom: A Block-Booking Explanation," FMG Discussion Papers dp481, Financial Markets Group.
    • Handle: RePEc:fmg:fmgdps:dp481
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