U.S. News: Analyst hype in IPOs: Explaining the popularity of book building

Professor Kent Womack via U.S. News & World Report about IPO book building versus IPO auctions, questionning the reasons behind the prevailing practice of the U.S. companies relinquishing control of the IPO process to underwriters rather than conducting IPO auctions:

"Issuers are at the mercy of underwriters," says Kent Womack, an associate professor of finance at the Tuck School of Business at Dartmouth, "because underwriters have all the buyers." Professor Womack and his collaborators Francois Degeorge (University of Lugano) and Francois Derrien (Rotman School of Management, University of Toronto) co-wrote a research paper - "Analyst Hype in
IPOs: Explaining the Popularity of Bookbuilding" - suggesting that "IPO issuers and investment banks have formed a quid pro quo relationship in which issuers are willing to absorb the cost of book building in exchange for more - and more favorable - research coverage. But their research also indicates that these supposed benefits are not always forthcoming for the issuer."

Source: U.S. News & World Report May 09,2006