Auctions versus book – building underwriting of Japanese IPOs: OTC, Mothers,and NASDAQ - Japan issus

Abstract

On September 1, 1997, book-building underwriting was allowed along with competitive auctions to price Japanese IPOs. This study compares the initial return levels of IPOs using both methods from January 1, 1993 through December 31 , 2000 and finds the initial return levels significantly higher under book-building than under auctions of 803 IPOs listed on the OTC, Mothers, and/or NASDAQ-Japan markets. We do find that some of the same IPO issue and company variables explain the levels of initial returns under both regimes. However, allowing the underwriter to price the issue under the book-building method versus a competitive market pricing under the auction method has significantly raised the initial return levels. IPO firms "left more money on the table" under book building compared to auctions. This change in pricing responsibility has reduced wealth gains for the issuing companies while increasing wealth to investors associated with the higher level of underpricing from underwriter-priced issues following book-building.