Ipo Book Building Process

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APPLIED CORPORATE FINANCE Assignment: 1 Submitted to: Sir Asif Malik Submitted by: ZAINAB HASSAN L12-5295 Section C Question A: The IPO process is characterized by information asymmetries. Explain how these asymmetries may be reduced through the book-building process. Answer: Information asymmetries exist in an IPO market as the insiders have more information about the issuing shares than the investors. Moreover, the investors as well as firms don’t have enough information about the market. There exists a greater asymmetry in IPO market as compared to secondary market because there is no former data available for it. These asymmetries are somewhat limited by using book-building process to float initial public offerings instead of public auctions. The book-building process, which was first examined in the academic literature by Benveniste and Spindt (1989) and Benveniste and Wilhelm (1990), involves shares issuing company, investors and the intermediaries which are generally the investment banks. The investment bank first decides the price range or band for the bidding and then invites investors to evaluate and perhaps buy the issue. Next, investors evaluate the issue and provide the investment bank with preliminary indications of their demand for the issue. Finally, the investment bank prices the issue and allocates shares to investors, generally allocating more shares to investors who indicate higher levels of demand. Journal of Financial Economics 65 (2002) 3–29 Building the IPOorder book: underpricing and participation limits with costly information$ Ann E. Shermana,*, Sheridan Titmanb The investment bank reviews and assesses the entire relevant internal information of the company and then evaluates the shares to decide a price range for them. The information including company results, track record and

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