Rationing in Ipos

56 Pages Posted: 10 Apr 2003

See all articles by Christine A. Parlour

Christine A. Parlour

University of California, Berkeley - Finance Group

Uday Rajan

Stephen M. Ross School of Business, University of Michigan

Date Written: March 2003

Abstract

We provide a model of bookbuilding in IPOs, in which the issuer can choose to ration shares. We consider two allocation rules. Under share dispersion, before informed investors submit their bids, they know that, in the aggregate, winning bidders will receive only a fraction of their demand. We demonstrate that this mitigates the winner's curse, that is, the incentive of bidders to shade their bids. It leads to more aggressive bidding, to the extent that rationing can be revenue-enhancing. In a parametric example, we characterize bid and revenue functions, and the optimal degree of rationing. We show that, when investors' information is diffuse, maximal rationing is optimal. Conversely, when their information is concentrated, the seller should not ration shares. We determine the optimal degree of rationing in a class of credible mechanisms. Our model reconciles the documented anomaly that higher bidders in IPOs do not necessarily receive higher allocations.

JEL Classification: D44, G2

Suggested Citation

Parlour, Christine A. and Rajan, Uday, Rationing in Ipos (March 2003). Available at SSRN: https://ssrn.com/abstract=302497 or http://dx.doi.org/10.2139/ssrn.302497

Christine A. Parlour (Contact Author)

University of California, Berkeley - Finance Group ( email )

Haas School of Business
545 Student Services Building
Berkeley, CA 94720
United States
510-643-9391 (Phone)

Uday Rajan

Stephen M. Ross School of Business, University of Michigan ( email )

701 Tappan Street
Ann Arbor, MI 48109
United States
734-764-2310 (Phone)

HOME PAGE: http://webuser.bus.umich.edu/urajan

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