Why Don't Issuers Choose IPO Auctions? The Complexity of Indirect Mechanisms

Ravi Jagannathan, Andrei Jirnyi and Ann Sherman

No 16214, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In this paper we present a comprehensive comparison of IPO placement methods in over 50 countries. We find that out of the three primary methods, fixed price public offers, auctions, and book building, auctions are least popular with issuers. Since auctions allow for price discovery while avoiding the potential conflict of interest between issuer and underwriter, this is a surprising finding that is not adequately explained in the existing literature. We propose a new explanation: namely, that participating in auctions is substantially more difficult for investors compared to the other methods, and that this complexity can lead to investor behavior that is undesirable for the issuer. We suggest that this effect could be mitigated through a hybrid mechanism that resembles the one that is used in US treasury auctions.

JEL-codes: D02 D44 G0 G12 G24 G3 H0 H10 H26 H29 (search for similar items in EconPapers)
Date: 2010-07
Note: AP CF
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Citations: View citations in EconPapers (6)

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