Share Auctions of Initial Public Offerings: Global Evidence

Posted: 21 Mar 2016

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: March 19, 2016

Abstract

While a number of countries have tried the use of sealed bid share auctions for initial public offerings (IPOs), few continue to use them. This is a puzzle, since auctions have been successfully used in a variety of situations for other financial securities, particularly for the sale of government bonds. We provide an explanation for this puzzle: Bidding in sealed bid auctions for new issues is complex, particularly when the underlying shares are difficult to value and the auction is open to large numbers of potential bidders, some of whom might be naïve. Participation fluctuations make it difficult for even sophisticated bidders to shave accurately for the winner’s curse, and mistakes by some bidders impose costs on all. Our findings suggest that a hybrid auction mechanism that limits participation in the auction tranche to sophisticated investors, along with a non-competitive tranche that is open to all investors, can reduce such mistakes while at the same time providing the necessary incentives for information gathering.

Keywords: Sealed bid auction, Winner’s curse, Initial public offering, IPO, IPO auction, Common value auction.

Suggested Citation

Jagannathan, Ravi and Jirnyi, Andrei and Sherman, Ann E., Share Auctions of Initial Public Offerings: Global Evidence (March 19, 2016). Journal of Financial Intermediation, Vol. 24, No. 3, 2015. Available at SSRN: https://ssrn.com/abstract=2750934

Ravi Jagannathan

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 (Contact Author)

DePaul University ( email )

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

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