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ABSTRACT: Analyst Hype in IPOs: Explaining the Popularity of Bookbuilding

François Degeorge, University of Lugano
François Derrien, Rotman School of Management, University of Toronto
Kent L. Womack, Tuck School of Business, Dartmouth College

September 2005

The bookbuilding procedure for selling initial public offerings (IPO) to investors has captured significant market share from auction alternatives in recent years, despite the significantly lower costs related to the auction mechanism in terms of direct fees and initial underpricing. This article shows that in the French market, where the frequency of bookbuilding and auctions was approximately equal in the 1990s, the ostensible advantages to the issuer using bookbuilding were advertising-related benefits. Specifically, we find that book-built issues were more likely to be followed and positively recommended by the lead underwriters, as well as to receive "booster shots" after issuance if the shares had fallen. Even nonunderwriters' analysts appear to promote book-built issues more but only as a way of currying favor with the IPO underwriter for allocations of future deals. Yet we do not observe valuation or post-IPO return differentials that suggest these types of promotion have any value to the issuing firm. We conclude that underwriters using the bookbuilding procedure have convinced issuers of the questionable value of the advertising and promotion of their shares.

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