2001 Sheridan Rd
Finance Dept. Rm 401
Evanston, IL 60208
Institutional Affiliation: Northwestern University
NBER Working Papers and Publications
|July 2010||Why Don't Issuers Choose IPO Auctions? The Complexity of Indirect Mechanisms|
with Ravi Jagannathan, Ann Sherman: w16214
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 us...