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A Proposal to Restrict Manipulative Strategy in Auction IPO's

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  • Ganor, Mira

Abstract

Book-building, the prevailing method for IPO's, is widely considered flawed, because it results in stock under-pricing. Auction-IPO, on the other hand, is considered, by conventional wisdon, an alternative method that will eliminate the under-pricing. This paper shows how, contrary to customary belief, auction-IPO's may well result in under-pricing. In auction-IPO's, the under-pricing of the stock price is induced by undetected investors' manipulative strategic behavior. I analyze the requirements for such strategic behavior in a linear model. To reduce investors' incentive to manipulate their bid in the auction, this paper proposes to restrict auction participants from trading in the aftermarket immediately following the IPO.

Suggested Citation

  • Ganor, Mira, 2004. "A Proposal to Restrict Manipulative Strategy in Auction IPO's," Berkeley Olin Program in Law & Economics, Working Paper Series qt4sg5191h, Berkeley Olin Program in Law & Economics.
    • Handle: RePEc:cdl:oplwec:qt4sg5191h
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