Auctioned IPOs: The US evidence

Abstract

Between 1999 and 2007, WR Hambrecht has completed 19 IPOs in the U.S. using an auction mechanism. We analyze investor behavior and mechanism performance in these auctioned IPOs using detailed bidding data. The existence of some bids posted at high prices suggests that some investors (mostly retail) try to free-ride on the mechanism. But institutional demand in these auctions is very elastic, suggesting that institutional investors reveal information in the bidding process. Investor participation is largely predictable based on deal size, and demand is dominated by institutions. Flipping is equally prevalent in auctions as in bookbuilt deals-but unlike in bookbuilding, investors in auctions tend to flip their shares more in cold deals. Finally, we find that institutional investors, who provide more information, are rewarded by obtaining a larger share of the deals that have higher initial returns. Our results therefore suggest that auctioned IPOs could be an effective alternative to traditional bookbuilding.

A, B or C? Experimental Tests of IPO Mechanisms

“…The large underpricing associated with the traditional book‐built issuances alongside the existence of potential conflicts of interest have spurred a vigorous discussion about the optimal design of Initial Public Offerings (IPO). While, several contributions have highlighted the theoretical advantages (Ausubel, ; Biais et al , ; Bennouri and Falconieri, ) and empirical superiority of auction‐like mechanisms (Derrien and Womack, ; Vandemaele, ; Degeorge et al , ), book‐building is still the most common methodology as documented, among others, by Sherman (), Jagannathan and Sherman () and Ljungqvist (). These authors suggest that auctions may have not replaced bookbuilding because the most common auction structure (uniform price) carries significant undersubscription risks and does not provide incentives to fully reveal information.…”

“…These authors suggest that auctions may have not replaced bookbuilding because the most common auction structure (uniform price) carries significant undersubscription risks and does not provide incentives to fully reveal information. However, several studies (Derrien and Womack, ; Vandemaele, ; Degeorge et al , ) show that carefully designed auction procedures can mitigate those problems and provide superior outcomes. The lack of consensus on the superiority of any of these pure offering mechanism allows conjecture that the solution to bookbuilding shortcomings may require the development of a ‘hybrid’ procedure that blends the properties of existing and newly designed mechanisms, as argued by Jagannathan et al () Vandemaele () and in line with findings in Derrien and Womack ()…”

Restrictions on Allocation Discretion: Evidence from Clawbacks in Hong Kong IPOs

“…Degeorge et al (2010) also show the size of the o®ering is a main driver of investor participation in auction IPOs in the US, arguing that it can be readily predicted before o®er is marketed.…”

“…10 It is pertinent to note that, in spite of the fact that most of the countries who have tried auction IPOs over the years have eventually abandoned them (see Jagannathan et al (2010) for a survey), the IPO literature has recently bene¯ted from an upsurge in empirical research in auction IPOs, thanks in part to data availability in some select markets. The works of Kerins et al (2007), Lin et al (2007), Degeorge et al (2010), Jagannathan et al (2010), and Chiang et al (2010) are just some examples of such studies. The availability of data for bookbuilt IPOs in HK makes it possible for this study to explore many of the questions addressed in these studies within the context of the bookbuilding mechanism.…”

A Joint Experimental Analysis of the Dutch Auction, Book Building and Competitive IPO Pricing Methods

“…The disadvantages of book building led many authors to advocate its replacement by one of the existing kinds of auction (Spatt and Srivastava, 1991;Degeorge et al, 2008;Lowry et al, 2010). The auction was supported by Derrien and Womack (2003) and Derrien (2005), who compared it to the fixed price and book building offer-pricing procedures in France.…”