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ABSTRACT: Auctions vs. Bookbuilding and the Control of Underpricing in Hot IPO Markets

François Derrien, Rotman School of Management, University of Toronto
Kent L. Womack, Dartmouth College

Market returns before the offer price is set affect the amount and vaiability of initial public offering (IPO) underpricing. Thus an important question is What IPO procedure is best adapted for controlling underpricing in "hot" versus "cold" market conditions?" The French stock market offers a unique arena for empirical research on this top, since three substantially different issuing mechanisms (auctions, bookbuilding, and fixed price) are used there. Using 1992-1998 data, we find that the auction mechanism is associated with less underpricing and lower varience of underpricing. We show that the auction procedure's ability to incorporate more information from recent market conditions into the IPO price is an important reason.

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