Journal of Financial Studies, Vol 11, No 1 (2003)

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The Determination of Underwriting Mechanisms and Itfs Impact on IPO Discount: Auction, Bookbuilding and Fixed Price

Tai Ma, Te-Chung Hu


In this study we attempt to provide a more complete analysis on the issuerfs decision of underwriting mechanisms among auction, bookbuilding and fixed price methods. There are a plethora of studies on the reasons for IPO discount; however, little has been done regarding a more important question, namely, how does the issuing firm choose among different underwriting mechanisms? We develop a model to analyze the determination of underwriting mechanisms. In addition, we also take into consideration factors such as liquidity, uncertainty and competitiveness not accounted for in Ma and Hong (1998). Our empirical study shows that the IPO discounts of auction and bookbuilding are lower than that of fixed price method. In addition, we find that firms with higher stock liquidity, bullish industry outlook and lower industry uncertainty tend to choose auction or bookbuilding. Our test supports Ma and Hongfs viewpoint that the firms with higher degree of information asymmetry and better performance, tend to choose auction rather than fixed price method.

Keywords: underwriting mechanism, auction, bookbuilding, fixed price, information asymmetry, IPO discount.

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