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IPO underpricing during the boom: a block-booking explanation

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A bank can efficiently underwrite individually difficult to value IPOs by offering them as a package deal to a stable coalition of investors (block-booking). Block-booking banks set offer prices to equalize downside risk across their offerings, not expected returns. Examining US IPOs over the 1986 to 2003 period, I find that this is so. Given the return distribution on non-tech IPOs during non-boom years, equalizing downside risk implies that the average initial return on tech/boom IPOs equals 48% (actual value: 46%). The block-booking theory accounts for both the direction and magnitude of differences in average initial returns across IPO types.

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en

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application/pdf

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http://eprints.lse.ac.uk/24679/1/dp481.pdf

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