Rationing in IPOs
AbstractWe 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.
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Bibliographic InfoPaper provided by Fondazione Eni Enrico Mattei in its series Working Papers with number 2003.26.
Date of creation: Mar 2003
Date of revision:
Find related papers by JEL classification:
- D44 - Microeconomics - - Market Structure and Pricing - - - Auctions
- G2 - Financial Economics - - Financial Institutions and Services
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- Jay Ritter & Ivo Welch, 2002.
"A Review of IPO Activity, Pricing and Allocations,"
Yale School of Management Working Papers
ysm258, Yale School of Management, revised 01 Apr 2002.
- 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, 08.
- Jay Ritter & Ivo Welch, 2002. "A Review of IPO Activity, Pricing, and Allocations," NBER Working Papers 8805, National Bureau of Economic Research, Inc.
- 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.
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