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Why Don't Issuers Choose IPO Auctions? The Complexity of Indirect Mechanisms

Author

Listed:
  • Ravi Jagannathan
  • Andrei Jirnyi
  • Ann Sherman

Abstract

In this paper we present a comprehensive comparison of IPO placement methods in over 50 countries. We find that out of the three primary methods, fixed price public offers, auctions, and book building, auctions are least popular with issuers. Since auctions allow for price discovery while avoiding the potential conflict of interest between issuer and underwriter, this is a surprising finding that is not adequately explained in the existing literature. We propose a new explanation: namely, that participating in auctions is substantially more difficult for investors compared to the other methods, and that this complexity can lead to investor behavior that is undesirable for the issuer. We suggest that this effect could be mitigated through a hybrid mechanism that resembles the one that is used in US treasury auctions.

Suggested Citation

  • Ravi Jagannathan & Andrei Jirnyi & Ann Sherman, 2010. "Why Don't Issuers Choose IPO Auctions? The Complexity of Indirect Mechanisms," NBER Working Papers 16214, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:16214
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    Citations

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    Cited by:

    1. Jones, Steven L. & Yeoman, John C., 2014. "Initial uncertainty and the risk of setting a fixed-offer price: Implications for the pricing of bookbuilt and best-efforts IPOs," Journal of Corporate Finance, Elsevier, vol. 27(C), pages 194-215.
    2. Jacob, Joshy & Agarwalla, Sobhesh Kumar, 2012. "Mandatory IPO Grading: Does it Help Pricing Efficiency?," IIMA Working Papers WP2012-12-07, Indian Institute of Management Ahmedabad, Research and Publication Department.
    3. Schnitzlein, Charles R. & Shao, Minjie, 2013. "Capacity constraints and the winner's curse in multi-unit common value auctions," The Quarterly Review of Economics and Finance, Elsevier, vol. 53(2), pages 188-201.
    4. Emmanuel Morales-Camargo, 2013. "Restrictions on Allocation Discretion: Evidence from Clawbacks in Hong Kong IPOs," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 3(03n04), pages 1-57.
    5. Neupane, Suman & Paudyal, Krishna & Thapa, Chandra, 2014. "Firm quality or market sentiment: What matters more for IPO investors?," Journal of Banking & Finance, Elsevier, vol. 44(C), pages 207-218.
    6. Jagannathan, Ravi & Jirnyi, Andrei & Sherman, Ann Guenther, 2015. "Share auctions of initial public offerings: Global evidence," Journal of Financial Intermediation, Elsevier, vol. 24(3), pages 283-311.

    More about this item

    JEL classification:

    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • G0 - Financial Economics - - General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G3 - Financial Economics - - Corporate Finance and Governance
    • H0 - Public Economics - - General
    • H10 - Public Economics - - Structure and Scope of Government - - - General
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • H29 - Public Economics - - Taxation, Subsidies, and Revenue - - - Other

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