Working Paper: NBER ID: w12151
Authors: Ravi Jagannathan; Ann E. Sherman
Abstract: We document a somewhat surprising regularity: of the many countries that have used IPO auctions, virtually all have abandoned them. The common explanations given for the lack of popularity of the auction method in the US, viz., issuer reluctance to try a new experimental method, and underwriter pressure towards methods that lead to higher fees, do not fit the evidence. We examine why auctions have failed and verify, to the extent possible, that they are consistent with what academic theory predicts. Both uniform price and discriminatory auctions are plagued by unexpectedly large fluctuations in the number of participants. The free rider problem and the winner's curse hamper price discovery and discourage investors from participating in auctions. Calculating the optimal bids in large multi-unit common value auctions with endogenous entry imposes a huge computational burden. With IPOs taking place sporadically, and each firm being different, auctions are likely to end up being unstable.
Keywords: IPO; auctions; book building; winners curse; free rider problem
JEL Codes: G24; G28; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| auction characteristics (D44) | investor participation (G24) |
| winners curse (D44) | auction participation (D44) |
| free rider problem (H40) | auction participation (D44) |
| auction participation (D44) | price discovery (D47) |
| number of bidders (D44) | auction outcomes (D44) |
| winners curse (D44) | bid adjustments (D44) |
| bid adjustments (D44) | auction process (D44) |
| uninformed bidders (D44) | auction volatility (D44) |
| unsophisticated investors (G24) | serious bidders (D44) |
| large multiunit IPO auctions (D44) | auction instability (D44) |
| auction method (D44) | book building preference (Y30) |