Share auctions of initial public offerings: Global evidence

Ravi Jagannathan*, Andrei Jirnyi, Ann Guenther Sherman

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

18 Scopus citations

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.

Original languageEnglish (US)
Pages (from-to)283-311
Number of pages29
JournalJournal of Financial Intermediation
Volume24
Issue number3
DOIs
StatePublished - Jul 1 2015

Keywords

  • Common value auction
  • IPO
  • IPO auction
  • Initial public offering
  • Sealed bid auction
  • Winner's curse

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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