Question: Since the burst of the dot-com bubble in 2001, the issuing mechanism known as bookbuilding has been under attack. Bookbuilding refers to the process of determining the price at which an IPO will be offered. An underwriter fills the book with the prices that investors indicate they are willing to pay per share. Upon closing the book, the underwriter determines the issue price by analyzing these values. Thus, this IPO mechanism leaves much discretion to underwriters in terms of pricing and allocation of the IPO shares.
Its opponents claim that bookbuilding is an unfair mechanism that gives too much decision power to underwriters. Since 1999, WR Hambrecht has conducted auctioned IPOs open to all investors in the United States. (See Degeorge, Derrien, and Womack (2010), and Lowry, Officer, and Schwert (2010) for a description of these auctions and an analysis of their performance.) Discuss the pros and cons of auctions in the presence of sentiment investors.