Bookbuilding with heterogeneous investors

Bidding styles of institutional investors in IPO auctions

“…This supports Rock's (1986) argument that in the presence of a winner's curse, uninformed investors' participation in the IPO market depends on offer prices being set at a sufficient discount. It is also consistent with Leite (2006), who shows that it is optimal for less-informed investors to scale down their bids, which leads to underpricing, when investors who are involved in bookbuilding are heterogeneous with respect to their information. Finally, several researchers test and find support for Rock's (1986) prediction that allocation-weighted initial returns will be lower than equally-weighted initial returns in fixed-price offers (e.g., Koh and Walter, 1989;Levis, 1990;Keloharju, 1993;Amihud et al, 2003).…”

“…We find that regular bidders, who represent the bulk of demand and who tend to be less-informed bidders, bid conservatively, which puts downward pressure on the offer price. Their bidding strategy is consistent with Rock's (1986) argument that the offer price should reflect a sufficient discount that ensures the continuing participation of uninformed investors (e.g., Leite, 2006).…”

Adverse selection, public information, and underpricing in IPOs

“…In an earlier version of the paper bookbuilding was incorporated but at the cost of a significant increase in complexity. The winner's curse problem persists despite bookbuilding since investors submit their bids before having perfect information about the demand for the issue, as in Leite (2006). I assume that the issuer seeks to maximize expected proceeds E(R s,m ), which implies a tradeoff between the IPO price and the success probability of the issue: a higher price reduces the success probability of the issue by reducing the set of potential bidders and increasing the quality of the marginal investor.…”

“…The observation that the expected return to uninformed participation under the winner's curse argument may be negative is also made by Leite (2006) in the context of bookbuilt IPOs, but without incorporating public information. Still, the extent to which the prediction that the return to uninformed participation is negative and positively related to market returns applies to bookbuilt IPOs (among institutional as well as retail investors) may be addressed purely from an empirical point of view.…”

How do Financial Intermediaries Create Value in Security Issues?*

“…11 See also Gondat-Larralde and James (2008). 12 See also Leite (2006) for an alternative explanation of why informed investors tend to get better allocations. …”