Why Don’t Issuers Choose IPO Auctions? The Complexity of Indirect Mechanisms
43 Pages Posted: 22 Jan 2009 Last revised: 19 Dec 2012
Date Written: January 19, 2009
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.
Keywords: IPOs, initial public offerings, auction, direct mechanism, free rider, winner's curse, Dutch auction, dirty Dutch auction
JEL Classification: G24, G28, G32
Suggested Citation: Suggested Citation