Lm. Benveniste et Wy. Busaba, BOOKBUILDING VS. FIXED PRICE - AN ANALYSIS OF COMPETING STRATEGIES FOR MARKETING IPOS, Journal of financial and quantitative analysis, 32(4), 1997, pp. 383-403
We compare two mechanisms for selling IPOs, the fixed price method and
American bookbuilding, when investors have correlated information and
can observe each other's subscription decisions. In this environment,
the fixed price method is a strategy that can create cascading demand
. Alternatively, an underwriter building a book aggregates investor in
formation into the offer price. We find that bookbuilding generates hi
gher expected proceeds but exposes the issuer to greater uncertainty,
and that it provides the option to sell additional shares that are not
underpriced on the margin.