Why Do IPO Auctions Fail?

55 Pages Posted: 10 Jan 2006

See all articles by Ann E. Sherman

Ann E. Sherman

DePaul University

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

Multiple version iconThere are 2 versions of this paper

Date Written: October 15, 2006

Abstract

We document a somewhat surprising regularity: of the many countries that have used IPO auctions, virtually all have abandoned them. The common explanations given for the lack of popularity of the auction method in the US, viz., issuer reluctance to try a new experimental method, and underwriter pressure towards methods that lead to higher fees, do not fit the evidence. We examine why auctions have failed and verify, to the extent possible, that they are consistent with what academic theory predicts. Both uniform price and discriminatory auctions are plagued by unexpectedly large fluctuations in the number of participants. The free rider problem and the winner's curse hamper price discovery and discourage investors from participating in auctions. Calculating the optimal bids in large multi-unit common value auctions with endogenous entry imposes a huge computational burden. With IPOs taking place sporadically, and each firm being different, auctions are likely to end up being unstable.

Keywords: IPO, underpricing, auction, uniform price, discriminatory, winner's curse, free rider

JEL Classification: G24, G28, G32

Suggested Citation

Sherman, Ann E. and Jagannathan, Ravi, Why Do IPO Auctions Fail? (October 15, 2006). Available at SSRN: https://ssrn.com/abstract=874344 or http://dx.doi.org/10.2139/ssrn.874344

Ann E. Sherman (Contact Author)

DePaul University ( email )

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Ravi Jagannathan

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
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United States
847-491-8338 (Phone)
847-491-5719 (Fax)

National Bureau of Economic Research (NBER)

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

Shanghai Jiao Tong University
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Shanghai, 200030
China

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

Hyderabad, Gachibowli 500 019
India

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