TY  - JOUR
AU  - Sherman,Ann E.
AU  - Titman,Sheridan
TI  - Building the IPO Order Book: Underpricing and Participation Limits With Costly Information
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 7786
PY  - 2000
Y2  - July 2000
UR  - http://www.nber.org/papers/w7786
L1  - http://www.nber.org/papers/w7786.pdf
N1  - Author contact info:
Sheridan Titman
Finance Department
McCombs School of Business
University of Texas at Austin
Austin, TX 78712-1179
Tel: 512/232-2787
Fax: 512/471-5073
E-Mail: titman@mail.utexas.edu
AB  - This paper examines the book building mechanism for marketing initial public offerings.  We present a model where the underwriter selects a group of investors along with a pricing and allocation mechanism in a way that maximizes the information generated during the process of going public at a minimum cost. Unlike previous models, we take into account the moral hazard problem that is faced by investors when evaluation is costly. Our results suggest that for firms with the most to gain from accurate pricing, the number of investors participating in the offering is larger, and underpricing will be greater.  When the demand for accuracy is relatively low, the expected amount of underpricing exactly offsets the investors' costs of acquiring information.  However, when the demand for accuracy is high, the expected amount of underpricing can exceed the cost of information and investors can earn rents.
ER  -