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Investor Interest, Trading Volume, and the Choice of Ipo Mechanism in France

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Investor Interest, Trading Volume, and the Choice of Ipo Mechanism in France
International Review of Financial Analysis 16 (2007) 116 – 135

Investor interest, trading volume, and the choice of IPO mechanism in France
Salim Chahine *
American University of Beirut, The Suliman S. Olayan School of Business, Bliss Street, P.O.Box: 11-0236, Beirut, Lebanon Received 3 February 2004 Available online 7 November 2005

Abstract This paper investigates the relationship between underpricing and investor interest level prior to and after the IPO date. Empirical tests show a significant 3-day buy-and-hold abnormal return of 19.15%. It is positively related to the share demand-to-offer ratio in the pre-market period and to trading volume in the aftermarket. Despite a high initial underpricing for some book-built issues, the book-building procedure allows for more effective pricing and a lower divergence of opinion among investors in the aftermarket than the auction-like procedure. D 2005 Elsevier Inc. All rights reserved.
JEL classification: G24; G28; G32 Keywords: IPO mechanisms; Underpricing; Share demand-to-offer ratio; Trading volume

1. Introduction The price setting process for initial public offerings (IPOs) is one of the most puzzling phenomena in finance. Prior empirical studies propose that investors participate in initial public offerings at an offer price lower than their own value expectations. Accordingly, there is international evidence about a significant positive abnormal return at the IPO date, usually called undepricing (Loughran, Ritter, & Rydqvist, 1994). The stimulation of investor interest is a central issue in the success of an IPO. Firms looking to attract investors thus have to accept underpricing when going public. Within this framework,

* Tel.: +961 1 374374x3722. E-mail address: salim.chahine@aub.edu.lb. 1057-5219/$ - see front matter D 2005 Elsevier Inc. All rights reserved. doi:10.1016/j.irfa.2005.10.002

S. Chahine / International Review of Financial Analysis 16 (2007) 116–135

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