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Question A: The IPO process is characterized by information asymmetries. Explain these asymmetries may be reduced through the book-building process.

According to Sherman (2002), the IPO process is characterized by the information asymmetries as there are two types of information asymmetries existing among the IPO issuer and the investors. First, the issuing firms are well aware about the conditions and situations of their own business as compared to the investors. Second, the investors are well aware about the firm’s outside factors as compared to the issuer.
Sherman (2002) noted that the IPO process provides more information to certain investors and provides less information to the other investors. The initial public offering prospectus focuses on past information and performance where as the market price offerings on ballpark figure concerning the future performance. The investors such as the institutional investors get estimates and information from certain analysis such as the Wall Street Analysis where as the retail investors get no estimates and information.
According to Sherman (2002), these information asymmetries may be reduced through the book building process. The book building process consists of three steps. In the first step, the investment bank chooses the investors who will be encouraged to evaluate the issue and possibly they purchase the issue. In the second step, the investors evaluate the issue and inform the investment bank about their demand for the issue. In the third step, the investment bank prices the issue and distributes the shares to the investors. The investment bank distributes more shares to the investors who have high demand. The book building process is very helpful in reducing the information asymmetries as through the book building process the issuer includes the estimates in initial public offering prospectus. The disclosure...

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