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

43 Pages Posted: 22 Jan 2009 Last revised: 19 Dec 2012

See all articles by Ravi Jagannathan

Ravi Jagannathan

Northwestern University - Kellogg School of Management; National Bureau of Economic Research (NBER); Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF); Indian School of Business (ISB), Hyderabad

Andrei Jirnyi

Northwestern University - Kellogg School of Management

Ann E. Sherman

DePaul University

Date Written: January 19, 2009

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 o ffers, 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 eff ect 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

Jagannathan, Ravi and Jirnyi, Andrei and Sherman, Ann E., Why Don’t Issuers Choose IPO Auctions? The Complexity of Indirect Mechanisms (January 19, 2009). Available at SSRN: https://ssrn.com/abstract=1330691 or http://dx.doi.org/10.2139/ssrn.1330691

Ravi Jagannathan (Contact Author)

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
429 Andersen Hall
Evanston, IL 60208
United States
847-491-8338 (Phone)
847-491-5719 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF) ( email )

Shanghai Jiao Tong University
211 West Huaihai Road
Shanghai, 200030
China

Indian School of Business (ISB), Hyderabad ( email )

Hyderabad, Gachibowli 500 019
India

Andrei Jirnyi

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

Ann E. Sherman

DePaul University ( email )

1 East Jackson Blvd.
Chicago, IL 60604-2287
United States
312-362-5499 (Phone)

Register to save articles to
your library

Register

Paper statistics

Downloads
354
rank
81,905
Abstract Views
1,832
PlumX Metrics