INITIAL PUBLIC OFFERING

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LITERATURE REVIEW
This section describes five key studies that have researched different forms of going public. This
chapter also provides a brief account of a study which analyzed spreads, in addition to outlining a
study which analyzed the impact of Internet technology on investment banking.

1. Kenji and Smith (2009)
Kenji and Smith (2004) study the benefits and drawbacks of auctions versus book building as a
method of IPO issuance in Japan. Their reason for choosing Japan as a test environment was due
to the fact that book building has been a legal way of going public in Japan since 1997.
Previously, auctioning was the only way that a company could go public in Japan. In their
research, Kenji and Smith use the total issue cost as a percentage of the value of the issue to
measure the benefits and drawbacks of the different methods of going public


Sherman and Jagannathan (2009)
In their study Sherman and Jagannathan identify the underlying reason for the relative
unpopularity of auctions as a means of going public. This study appears to be the most
comprehensive endeavor in terms of attempting to holistically identify the reasons auctions have
not been as attractive as other means of going public. Their research studies international trends
in auctions use. Here, the evidence overwhelmingly indicates that auctions have been tried in
over 20 countries but are rarely used today. “In other words, out of more than 45 countries, we
have not been able to find even one country in which auctions are currently the dominant
method.” (Sherman and Jagannathan 2005, 14)


Kaneko and Pettway (2008)
Kaneko and Pettway attempt to provide an answer to the question “Does book building provide a
better mechanism for issuing firms than auctions?” Similar to Kenji and Smith (2004), the
Japanese market is used to test the assumption. The Japanese auction process uses price
discriminating auctions, instead of a fixed price or market-clearing price as in the Open IPO
process.



Biasis and Faugeron-Crouzet (2007)
In their research, Biasis and Faugeron-Crouzet analyze different types of IPO auctions. They
study uniform price auctions, fixed price offerings, internet-based Open IPO mechanisms, and
auctions such as Mise en Vente in France. These were analyzed within a uniform theoretical
model. (Biasis and Faugeron-Crouzet 2002, 13-17). In fixed price offers, Biasis and Faugeron-
Crouzet found high initial returns. High returns were left both to institutional investors as well as
small-uninformed investors, because of a lack of adjustment for price and demand. For uniform
price auctions, underpricing was also evident, however with less underpricing than with fixed
price offers.



Wilhelm (2007)
Wilhelm’s research dwells into the issue of how the Internet has affected investment banking that
has relied on relationship based production technology to date. The methodology applied in this
study is based on previous research relating to investment banking. The author does not conduct
his own empirical study; instead, he identifies a list of anomalies that other studies have found
indicative of the phenomenon that investment banking, as we know it, could be changing.


Companies fall into t wo broad categories: Private and Public .
A privately held company has fewer shareholders and its owners don't have to disclose much
information about the company. When a privately held corporation needs additional capital, it
can borrow cash or sell stock to raise needed funds. Often "going public" is the best choice for a
growing business. Compared to the costs of borrowing large sums of money for ten years or
more, the costs of an initial public offering are small.