The Dutch Auction Myth

Abstract

The bursting of the internet bubble continues to have ripple effects on the initial public offering (IPO) process. Critics of this process have fashioned a complex set of interconnected objections to the orthodox bookbuilding method for conducting IPOs, pricing shares, and allocating them to preferred investors. Critics instead hail online reverse-bid, or Dutch, auctions (Dutch IPOs) as an alternative method promising more equitable access, efficient prices, and egalitarian allocations.

This article comprehensively assesses the case for Dutch IPOs. Part I dissects critiques of bookbuilding, which rely on anomalous data, derogate established financial literature, and largely evaporate in the face of recent regulations. Part II examines the empirical performance of Dutch IPOs, which have failed to distinguish themselves in the United States and around the world. Part III reveals ways in which Dutch IPOs may be susceptible to fraud and manipulation that bookbuilding is not. Ultimately, claims of the Dutch IPO's superiority over bookbuilding are unproven at best and at worst fail to appreciate certain risks.

Keywords: asymmetrical information, auctions, bidding rings, bookbuilding, Dutch IPO, Mise en Vente, OpenIPO, spinning, securities, strategic behavior, underpricing

JEL Classification: C70, D21, D44, D82, E22, G24, K22, K42, M14