NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

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

Ravi Jagannathan, Andrei Jirnyi, Ann Sherman

NBER Working Paper No. 16214
Issued in July 2010
NBER Program(s):   AP   CF

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.

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This paper was revised on December 21, 2012

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Document Object Identifier (DOI): 10.3386/w16214

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