Why Have Auctions Been Losing Market Shares to Bookbuilding in IPO Markets?

Abstract

We analyze Taiwan's IPO auctions to shed light on the diminishing role of auctions in IPO markets. In contrast to Ljungqvist and Wilhelm's (2002) results for bookbuilding IPOs, we find that underpricing increases with institutional allocation in auctions. This implies that issuing firms in auctions with higher institutional allocations leave more money on the table. Retail investors earn zero abnormal returns, suggesting that auctions do not benefit them. Institutional investors earn positive abnormal returns, but receive much lower allocations than in countries with bookbuilding. The results suggest that under bookbuilding underwriters could compensate institutional investors with higher allocations and lower underpricing, simultaneously reducing money left on the table and increasing institutional investors' expected dollar profits. This would benefit issuing firms and institutional investors, while not harming retail investors. Our welfare analysis implies that auctions are an inferior IPO method.