Who Makes the Choice on IPO Underwriting Methods? Issuers vs. Underwriters
Financial Management, Forthcoming
51 Pages Posted: 18 Nov 2014 Last revised: 13 Oct 2015
Date Written: December 1, 2014
We develop a measure of the expected net wealth gains of pre-IPO shareholders to explain the decision-making process of IPO issuers in selecting an underwriting method. Using unique Taiwanese IPO features, this investigation tests whether the underwriters control the issue method choice (the expected revenue collection hypothesis) or whether the issuers make the choice for the best interests of the pre-IPO shareholders (the expected net wealth gain hypothesis). We find evidence that the choice in the issue method is consistent with maximizing pre-IPO shareholders’ expected net wealth gains; no evidence exists that the IPO subscription revenues to the underwriters drive the choice. The findings suggest that most IPO issuers do not choose auctions. We accordingly offer insight into the important issue of IPO auction demise; however, this evidence cannot completely explain the total disappearance of auctions in many countries.
Keywords: Initial public offerings (IPOs), Fixed price public offer, Auction
JEL Classification: G24, G32
Suggested Citation: Suggested Citation