Share auctions of initial public offerings: Global evidence

Jagannathan, R and Jirnyi, A and Sherman, A G (2014) Share auctions of initial public offerings: Global evidence. Journal of Financial Intermediation.

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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.

ISB Creators:
ISB CreatorsORCiD
Jagannathan, RUNSPECIFIED
Item Type: Article
Uncontrolled Keywords: Common value auction; Initial public offering; IPO; IPO auction; Sealed bid auction; Winner's curse
Subjects: Finance
Depositing User: LRC ISB
Date Deposited: 04 Nov 2014 06:50
Last Modified: 04 Nov 2014 09:39
URI: http://eprints.exchange.isb.edu/id/eprint/154
Publisher URL: http://dx.doi.org/10.1016/j.jfi.2014.04.006
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