5
Asymmetric
information
theory
is one
of the
theories
that
explain
why
there
is a
difference
between
the
offering
price
of
the
IPO
and
the
closing
price
on
the
initial
market-trading
day.
From
Rock’s
(1986)
studies,
he argues
that the existence
of
underpricing
in
IPOs
and
uncertainties
in
the
issuers
are
high,
due
to
the
amount
of
information
available
to
potential
investors
regarding
about
the
IPO
firms
are
not
equal. Issuers
understand
more about the value of their firms than potential
investors,
hence
information
asymmetry
occurs.
This
information
asymmetry
will result
in
underpricing of the shares (Rock, 1986).
Loughran et al. (1994) has researched underpricing of IPOs across 39 different
countries
in
different
time
period
and
sample
size,
and
all
has
provided
a
significant
initial
return.
Ritter (1991)
has
extended
studies on shares post-IPO
performance
and
believed
that
underpricing
of
IPO
is
a
short
run
phenomenon,
and
in
the
long
run,
IPO
has
underperformed.
Jenkinson and
Ljungqvist (2001)
have
compiled studies
that
indicate
the
underperformed
long
run
performance
of
IPO.
The
last
couple
of
years,
many
researchers
have
concentrated
on
the
difference
mechanism
in
pricing
the IPOs.
When
it comes
to the pricing
and valuation
of an IPO, this can be achieved
by using
different
marketing
methods
in
determining
the
price.
There
will
be
two
marketing
methods
that will be discussed
in this paper,
book building
and fixed
price marketing
method. The book building method will be the dominant,
primary focus of this paper.
Book
building
has
been
introduced
to
Indonesia
in
the
year
2000. Book building
has
gained
popularity
and most
companies
have
chosen
book
building
marketing
method
than fixed price method by 2010.
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