Bookbuilding, the option to withdraw, and the timing of IPOs

The ability to withdraw IPOs when demand is weak increases expected proceeds and provides issuers with option value. To enhance this value, the SEC adopted in 2001 the 'public-to-private' safe harbor Rule 155 and simplified Rule 477 for withdrawing offerings. The option value can exceed the underpricing associated with soliciting investor demand. Hence, issuers might prefer bookbuilding despite the associated underpricing even if they could sell via fixed price at full expected value. The option value increases faster than underpricing with ex ante uncertainty, generating predictions regarding the use of bookbuilding and the timing of IPOs, and leading to a distinct theory of hot IPO markets.