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Rationing in IPOs

Author

Listed:
  • Christine A. Parlour

    (GSIA, Carnegie Mellon University)

  • Uday Rajan

    (GSIA, Carnegie Mellon University)

Abstract

We provide a model of bookbuilding in IPOs, in which the issuer can choose to ration shares. We consider two allocation rules. Under share dispersion, before informed investors submit their bids, they know that, in the aggregate, winning bidders will receive only a fraction of their demand. We demonstrate that this mitigates the winner’s curse, that is, the incentive of bidders to shade their bids. It leads to more aggressive bidding, to the extent that rationing can be revenue-enhancing. In a parametric example, we characterize bid and revenue functions, and the optimal degree of rationing. We show that, when investors’ information is diffuse, maximal rationing is optimal. Conversely, when their information is concentrated, the seller should not ration shares. We determine the optimal degree of rationing in a class of credible mechanisms. Our model reconciles the documented anomaly that higher bidders in IPOs do not necessarily receive higher allocations.

Suggested Citation

  • Christine A. Parlour & Uday Rajan, 2003. "Rationing in IPOs," Working Papers 2003.26, Fondazione Eni Enrico Mattei.
    • Handle: RePEc:fem:femwpa:2003.26
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    References listed on IDEAS

    as
    1. Jay R. Ritter & Ivo Welch, 2002. "A Review of IPO Activity, Pricing, and Allocations," Journal of Finance, American Finance Association, vol. 57(4), pages 1795-1828, August.
    2. Sherman, Ann E, 2000. "IPOs and Long-Term Relationships: An Advantage of Book Building," The Review of Financial Studies, Society for Financial Studies, vol. 13(3), pages 697-714.
    3. Biais, Bruno & Faugeron-Crouzet, Anne Marie, 2002. "IPO Auctions: English, Dutch, ... French, and Internet," Journal of Financial Intermediation, Elsevier, vol. 11(1), pages 9-36, January.
    4. Tim Jenkinson & Howard Jones, 2004. "Bids and Allocations in European IPO Bookbuilding," Journal of Finance, American Finance Association, vol. 59(5), pages 2309-2338, October.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    IPOs;

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • G2 - Financial Economics - - Financial Institutions and Services

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