Why Have Auctions Been Losing Market Shares to Bookbuilding in IPO Markets?

55 Pages Posted: 27 Jun 2003

See all articles by Ji-Chai Lin

Ji-Chai Lin

Hong Kong PolyU

Yi-Tsung Lee

Peking University - Guanghua School of Management

Yu-Jane Liu

National Chengchi University (NCCU) - Department of Finance and Banking

Date Written: June 1, 2003

Abstract

We analyze Taiwan's IPO auctions to shed light on the diminishing role of auctions in IPO markets. In contrast to Ljungqvist and Wilhelm's (2002) results for bookbuilding IPOs, we find that underpricing increases with institutional allocation in auctions. This implies that issuing firms in auctions with higher institutional allocations leave more money on the table. Retail investors earn zero abnormal returns, suggesting that auctions do not benefit them. Institutional investors earn positive abnormal returns, but receive much lower allocations than in countries with bookbuilding. The results suggest that under bookbuilding underwriters could compensate institutional investors with higher allocations and lower underpricing, simultaneously reducing money left on the table and increasing institutional investors' expected dollar profits. This would benefit issuing firms and institutional investors, while not harming retail investors. Our welfare analysis implies that auctions are an inferior IPO method.

Suggested Citation

Lin, Ji-Chai and Lee, Yi-Tsung and Liu, Yu-Jane, Why Have Auctions Been Losing Market Shares to Bookbuilding in IPO Markets? (June 1, 2003). Available at SSRN: https://ssrn.com/abstract=410183 or http://dx.doi.org/10.2139/ssrn.410183

Ji-Chai Lin (Contact Author)

Hong Kong PolyU ( email )

M715, Li Ka Shing Tower
Hung Hom, Kowloon
China

Yi-Tsung Lee

Peking University - Guanghua School of Management ( email )

Office 336, Guanghua Building 2
Beijing, Beijing 100871
China
(86-10) 6275 5742 (Phone)
(86-10) 6275 5742 (Fax)

Yu-Jane Liu

National Chengchi University (NCCU) - Department of Finance and Banking ( email )

64, Chih-nan Rd., Sec. 2, Mucha,
Taipei, 116
Taiwan ROC
(882)-2-2939-3091 ext. 81123 (Phone)

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