21 - Bookbuilding and share pre-allocation in IPOs

Abstract

Since the second half of the 1990s, initial public offerings (IPOs) in Continental Europe have increasingly used bookbuilding to market their shares. During this process, a special role is assigned to institutional investors, who frequently – but not always – are pre-allocated a fraction of the offering. This chapter empirically investigates the driving forces behind bookbuilding and share pre-allocation in IPOs. Using data on Belgian IPOs, it found that firms using the stock market as a financing vehicle are more likely to use bookbuilding and pre-allocate shares at the time of IPO. These decisions are not influenced by investor sentiment, as measured by the historical stock market return. However, information asymmetries are a major determinant of bookbuilding, whereas agency and monitoring considerations only influence the pre-allocation decision. Specifically, the firms where initial owners retain a large stake in the company post-IPO are less inclined to pre-assign a fraction of the offering to retail and institutional investors. Whereas, if post-IPO ownership by initial shareholders is smaller and the stock market is used as a financing vehicle, firms are more likely to pre-allocate shares at the time of IPO. Finally, the results demonstrates that underpricing is larger with bookbuilding whereas, preallocating shares reduces underpricing and enhance post-IPO stock liquidity.