Fixed price and book building methods in an exogenous environment: Evidence from Indonesia stock market

Hanafi M.M.

Center for Financial Market Studies, Faculty of Economics and Business, Universitas Gadjah Mada, Jalan Humaniora 1, Bulaksumur, Yogyakarta 55281, Indonesia


Abstract

Book building has become a popular method of selling new shares. Although previous models suggest that book building is an efficient method for price discovery in initial public offering (IPO) issuance, empirical evidence provides mixed results. Previous empirical findings on IPO methods have been obtained from markets that allow issuers to choose the IPO method, and this setting is not free from endogeneity issues. We investigate the effect of IPO method (fixed price vs book building) in Indonesia, which is an emerging market that offers an exogenous setting for IPO methods. More specifically, Indonesia used the fixed price method for IPOs before October 2000 and used the book building method thereafter following the introduction of new IPO regulations. Using estimation methods that consider clustering phenomena, we find that book building yields larger underpricing and greater volatility than the fixed price method. Moreover, a positive relationship is observed between underpricing and aftermarket volatility for the book building method and book building IPOs underperform fixed price IPOs. No relationship was observed between underpricing and long-term performance for book building IPOs. Compared with previous models, our findings suggest that book building does not represent a quality IPO method and suffers from agency conflict; thus, this method needs improvement. © 2021 Elsevier B.V.

Book building; Clustering; Emerging market; Fixed price; Indonesia; IPO; Underpricing


Journal

Research in International Business and Finance

Publisher: Elsevier Ltd

Volume 58, Issue , Art No 101430, Page – , Page Count


Journal Link: https://www.scopus.com/inward/record.uri?eid=2-s2.0-85107813569&doi=10.1016%2fj.ribaf.2021.101430&partnerID=40&md5=77cac98c4bef0091d58d11216cdd1ca9

doi: 10.1016/j.ribaf.2021.101430

Issn: 02755319

Type:


References

Affleck-Graves, J., Spiess, K., Underperformance in long-run stock returns following seasoned equity offerings (1995) J. Financ. Econ., 38, pp. 243-267; Aggarwal, R., Rivoli, P., Fads in the Initial Public Offering Market? (1990) Financial Manage., 19 (4), pp. 45-57; Agarwal, S., Liu, C., Ghon Rhee, S., Investor demand for IPOs and aftermarket performance: evidence from the Hong Kong stock market (2008) International Financial Markets, Institutions and Money, 18, pp. 176-190; Allen, F., Faulhaber, G.R., Signaling by underpricing in the IPO market (1989) J. financ. econ., 23, pp. 303-323; Autorea, D.M., Boultonb, T.J., Smartc, S.B., Zutterd, C.J., The impact of institutional quality on initial public offerings (2014) J. Econ. Bus., 73, pp. 65-96; Barber, B., Lyon, J., Detecting long-run abnormal stock returns: the empirical power and specification of test statistics (1997) J. Financ. Econ., 43, pp. 341-372; Benveniste, L.M., Busaba, Bookbuilding vs. Fixed Price: An Analysis of Competing Strategies for Marketing IPOs (1997) J. Financ. Quant. Anal., 324, pp. 383-403; Benveniste, L.M., Spindt, P.A., How investment bankers determine the offer price and allocation of new issues (1989) J. Financ. Econ., 24, pp. 343-361; Benveniste, L.M., Wilhelm, W.J., A Comparative Analysis of IPO Proceeds under Alternative Regulatory Environments (1990) J. Financ. Eco., 28, pp. 173-207; Biais, B., Faugeron-Crouzet, A., IPO auctions: english, Dutch,… French, and internet (2002) J. Financ. Intermediation, 11, pp. 9-36; Busaba, W.Y., Chang, C., Bookbuilding vs. Fixed price revisited: the effect of aftermarket trading (2010) J. Corp. Financ., 16, pp. 370-381; Butler, Alexander, W., Michael, O.K., Robert, K., Robust determinants of IPO underpricing and their implications for IPO research (2014) J. Corp. Financ., 27, pp. 367-383; Cameron, A.C., Miller, D.L., A practitioner’s guide to cluster-robust inference (2015) J. Hum. Resour., 50, pp. 317-372; Carter, R., Manaster, S., Initial public offerings and underwriter reputation (1990) J. Finance, 45, pp. 1045-1067; Chen, H.-C., Wu, S.-C., Who makes the choice on IPO underwriting methods? Issuers versus underwriters (2015) Financ. Manage., 44, pp. 753-783; Chen, H.-C., Shub, P.-G., Chiang, S.-J., The choice between bookbuilding and fixed-price offering: evidence from SEOs in Taiwan (2011) J. Int. Financial Mark. Inst. Money, 21, pp. 28-48; Chen, J., Ke, B., Donghui, W., Yang, Z., The consequences of shifting the IPO offer pricing power from securities regulators to market participants in weak institutional environments: evidence from China (2018) J. Corp. Financ., 50, pp. 349-370; Cheung, Y.-L., Ouyang, Z., Tan, W., How regulatory changes affect IPO underpricing in China (2009) China Econ. Rev., 20, pp. 692-702; Cornelli, F., Goldreich, D., Ljungqvist, A., Investor sentiment and pre-IPO markets (2006) J. Finance, 61, pp. 1187-1216; Derrien, F.Á., Kent Womack, L., Auctions vs. Book-building and the control of underpricing in hot IPO markets (2003) Rev. Financ. Stud., 16, pp. 31-61; Foucault, T., Sraer, D., Thesmar, D.J., Individual investors and volatility (2011) J. Finance, 66, pp. 1369-1406; Francis, B.B., Hasan, I., Lothian, J.R., Sun, X., The signaling hypothesis revisited: evidence from foreign IPOs (2010) J. Financ. Quant. Anal., 45, pp. 81-106; Gabaix, X., Gopikrishnan, P., Plerou, V., Eugene Stanley, H., Institutional investors and stock market volatility (2006) Q. J. Econ., 121, pp. 461-504; Helwege, J., Liang, N., Initial public offerings in hot and cold markets (2004) J. Financ. Quant. Anal., 39, pp. 541-569; Hu, B., Jiang, C., McInish, T., Ning, Y., Price clustering of chinese IPOs: the impact of regulation, cultural factors, and negotiation (2019) Appl. Econ., 51, pp. 1-13; Huang, H.-Y., Chiang, M.-H., Lin, J.-H., Lin, Y., Fixed-price, auction, and bookbuilding IPOs: empirical evidence in Taiwan (2017) Financ. Res. Lett., 22, pp. 11-19; Husnan, S., Hanafi, M.M., Munandar, M., Price stabilization and IPO underpricing: an empirical study in the indonesian stock exchange (2014) J. Indones. Econ. Bus., 29, pp. 129-141; Ibbotson, G.R., Price performance of common stock new issues (1975) J. Financ. Eco., 2 (3), pp. 235-272; Jagannathan, R., Sherman, A.E., Reforming the bookbuilding process for IPOs (2005) J. Appl. Corp. Financ., 17, pp. 67-72; Jagannathan, R., Sherman, A.E., Why Do IPO Auctions Fail? (2006), Unpublished working paper National Bureau of Economic Research; Jagannathan, R., Jirnyi, A., Guenther Sherman, A., Share auctions of initial public offerings: global evidence (2015) J. Financ. Intermediation, 24, pp. 283-311; Jamaani, F., Ahmed, A.D., Simultaneous effects of clustering and endogeneity on the underpricing difference of IPO firms: a global evidence (2020) Res. Int. Bus. Financ., 54; Kaneko, T., Pettway, R.H., Auctions versus book building of japanese IPOs (2003) Pacific-basin Financ. J., 11, pp. 439-462; Khurshed, A., Paleari, S., Pande, A., Vismara, S., Transparent bookbuilding, certification and initial public offerings (2014) J. Financ. Mark., 19, pp. 154-169; Kucukkocaoglu, G., Underpricing in Turkey: a comparison of the IPO methods (2008) J. Finance Econ., 13, pp. 162-182; Kutsuna, K., Smith, R.L., Why does book building drive out the auction method of IPO issuance? Evidence from Japan (2004) Rev. Financ. Stud., 17, pp. 1129-1166; Ljungqvist, A., Habib, M., Underpricing and Entrepreneurial Wealth Losses in IPOs: Theory and Evidence (2001) Rev. Financ. Stud., 14, pp. 433-458; Ljungqvist, A.P., Jenkinson, T., Wilhelm, W.J., Global integration in primary equity markets: the role of U.S. Banks and U.S. Investors (2003) Rev. Financ. Stud., 16, pp. 63-99; Loughran, T., Ritter, J., Rydqvist, K., Initial public offerings: International insights (1994) Pacific-Basin Finance J., 2 (2-3), pp. 165-199; Loughran, T., Ritter, J.R., Why has IPO underpricing changed over time? (2004) Financ. Manage., 33, pp. 5-37; Lowry, M., Officer, M., William Schwert, G., The variability of IPO initial return (2010) J. Finance, 65, pp. 425-465; Ma, M., Are We Really Doing What We Think We Are Doing? A Note on Finite Sample Estimates of Two Way Cluster Robust Standard Errors (2020), SSRN papers, accessed on August 30, 2020; Madyan, M., Sasikirono, N., Sumiati, Meidiaswati, H., The impact of public ownership and share warrants on market performance of IPOs: evidence from the Indonesian stock Exchange (IDX) (2020) Asia Pacific Management Review, , forthcoming; Neupanea, S., Poshakwale, S.S., Transparency in IPO mechanism: retail investors’ participation, IPO pricing and returns (2012) J. Bank. Financ., 36, pp. 2064-2076; Onali, E., Gianluca, G., Chrysovalantis, V., How should we estimate value-relevance models? Insights from European data (2017) Br. Account. Rev., 49, pp. 460-473; Ong, C.Z.O., Rasidah, M.-R., Nisham Taufil-Mohd, K., Do institutional investors drive the IPO valuation? (2020) Borsa Istanbul Review, , forthcoming; Parkinson, M., The extreme value method for estimating the variance of the rate of return (1980) J. Bus., 53, pp. 61-65; Petersen, M.A., Estimating standard errors in finance panel data sets: comparing approaches (2009) Rev. Financ. Stud., 22, pp. 435-480; Pettway, R.H., Thosar, S., Walker, S., Auctions versus book-built IPOs in Japan: a comparison of aftermarket volatility (2008) Pacific-basin Financ. J., 16, pp. 224-235; Ritter, J., The ‘Hot Issue’ Market of 1980 (1980) J. Bus., 57 (2), pp. 215-240; Ritter, J., Loughran, T., The New Issues Puzzle (1995) J. Fin., 50, pp. 23-51; Ritter, J.R., Welch, I., A review of IPO activity, pricing, and allocations (2002) J. Finance, 57, pp. 1795-1828; Rock, K., Why new issues are underpriced (1986) J. financ. econ., 15, pp. 187-212; Schwert, G., Lowry, M., IPO Market Cycles: Bubbles or Sequential Learning? (2002) J. Fin., 57, pp. 1171-1200; Sherman, A.E., IPOs and long-term relationships: an advantage of book building (2000) Rev. Financ. Stud., 13, pp. 697-714; Sherman, A.E., Global trends in IPO methods: book building vs. Auctions (2005) J. Financ. Econ., 78, pp. 615-649; Sherman, A., Titman, S., Building the IPO order book: underpricing and participation limits with costly information (2002) Journal of Financial Economics, 65 (1), pp. 3-29; Sias, R.W., Volatility and the Institutional Investor (1996) Financial Anal. J., 52 (2), pp. 13-20; Spatt, C., Srivastava, S., Preplay communication, participation restrictions, and efficiency in initial public offerings (1991) Rev Financ Stud, 4, pp. 709-726; Thompson, S.B., ’SImple formulas for standard errors that cluster by both firm and time’ (2011) J. Financ. Econ., 99 (1), pp. 1-10

Indexed by Scopus

Leave a Comment