Why the Google IPO Might Stay Exotic - An Experimental Analysis of Offering Mechanisms

Published as: Trauten, A., Langer, T. (2012): Information production and bidding in IPOs - An experimental analysis of auctions and fixed-price offerings, Zeitschrift für Betriebswirtschaft, Vol. 82, No.4, 361-388.

54 Pages Posted: 26 Mar 2008 Last revised: 27 Aug 2013

See all articles by Andreas Trauten

Andreas Trauten

University of Muenster - Finance Center

Thomas Langer

University of Muenster - Finance Center

Multiple version iconThere are 2 versions of this paper

Date Written: March 17, 2008

Abstract

Despite their theoretical efficiency in selling shares to the public, auctions are not the preferred mechanisms of issuers in Initial Public Offerings (IPOs). Chemmanur and Liu (2006) and Sherman (2005) provide a rational explanation for this "IPO auction puzzle" based on the notion that issuers are not only interested in maximizing the offering proceeds, but also care about the secondary market price and thus try to induce many investors to produce information about the IPO. In this paper, we report an experimental study that was set up to test the mechanisms underlying this reasoning. Our findings strongly support the theoretical argument. If the issuer has some discretion in setting the offering price (as with bookbuilding or fixed-price offerings), he can maintain investors' propensity to produce information by appropriately adjusting the offering price even if information costs are high. In auctions, however, high information costs inevitably result in a low propensity to produce information. This is a consequence of investors' competitive bidding behavior which prevents them from recovering the costs of information production. Our results provide experimental support for the theoretical argument that an auction is not the preferable offering mechanism for young and risky IPO firms since the costs of producing information about such firms are high, but there is also a strong need to generate information.

Keywords: Initial Public Offerings, IPO auctions, fixed-price offerings, endogenous entry, experimental finance

JEL Classification: C72, D84, G24, G32

Suggested Citation

Trauten, Andreas and Langer, Thomas, Why the Google IPO Might Stay Exotic - An Experimental Analysis of Offering Mechanisms (March 17, 2008). Published as: Trauten, A., Langer, T. (2012): Information production and bidding in IPOs - An experimental analysis of auctions and fixed-price offerings, Zeitschrift für Betriebswirtschaft, Vol. 82, No.4, 361-388., Available at SSRN: https://ssrn.com/abstract=1107885 or http://dx.doi.org/10.2139/ssrn.1107885

Andreas Trauten

University of Muenster - Finance Center ( email )

Universitatsstr. 14-16
Muenster, 48143
Germany

Thomas Langer (Contact Author)

University of Muenster - Finance Center ( email )

Universitatsstr. 14-16
Muenster, 48143
Germany
+49 251 83 22033 (Phone)

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