The choice between bookbuilding and fixed-price offering: Evidence from SEOs in Taiwan

As bookbuilding is less costly in terms of underpricing and has become the dominant underwriting method in initial public offerings (IPOs) (see Sherman, 2005), we examine whether the pattern still holds in seasoned equity offerings (SEOs) and find that only 15% (93 out of 610 sample firms) of SEO issuers in Taiwan selected the bookbuilding method. Among the fixed-price offerings, 84% of issuers would have had lower total issue costs in terms of the sum of gross spread and SEO underpricing, if the bookbuilding procedure was selected instead. It raises a question: Why do most SEO issuers in Taiwan prefer the costly fixed-price offer to the bookbuilding offer? Extending Barry (1989), we propose a measure of wealth loss to the existing shareholders to analyze this question. After considering the effect resulting from the pre-emption rights held by the existing shareholders, we find that the average wealth loss of fixed-price offerings is less than that of the bookbuilding offerings. That is, most SEO issuers are rational in choosing between the two underwriting mechanisms based on the expected wealth loss.