The investigations in the beginning of the 2000s of the IPO practices following dot.com bubble have spurred hot debates among regulators as well as academics about the issuing methods most widely adopted. The discussion about the superiority of one or another traditional IPO mechanism in controlling the underpricing is still largely open, although practitioners have started actively developing and implementing novel mechanisms. In 2004 two large IPOs have been conducted through non-traditional methods: Dutch auction (Google) and a pioneering method named “competitive IPO” (Pages Jaunes). The present paper investigates the investors’ behavior in competitive IPO, in particular, we stipulate that this method increases competition not only among banks but also among investors resulting in more information revelation and less underpricing compared to traditional bookbuilding. We adopt an experimental methodology approach to deal with the lack of reliable field data. Our results show that in competitive IPO investors consistently reveal more information compared to traditional bookbuilding, and for experienced investors the difference in information revelation between the two mechanisms becomes even more pronounced. The underpricing (and its volatility) is also significantly lower for the newly introduced methodology.
Underpricing, bookbuilding and competitive IPO: an experimental analysis
BONINI, STEFANO;VOLOSHYNA, OLENA
2007
Abstract
The investigations in the beginning of the 2000s of the IPO practices following dot.com bubble have spurred hot debates among regulators as well as academics about the issuing methods most widely adopted. The discussion about the superiority of one or another traditional IPO mechanism in controlling the underpricing is still largely open, although practitioners have started actively developing and implementing novel mechanisms. In 2004 two large IPOs have been conducted through non-traditional methods: Dutch auction (Google) and a pioneering method named “competitive IPO” (Pages Jaunes). The present paper investigates the investors’ behavior in competitive IPO, in particular, we stipulate that this method increases competition not only among banks but also among investors resulting in more information revelation and less underpricing compared to traditional bookbuilding. We adopt an experimental methodology approach to deal with the lack of reliable field data. Our results show that in competitive IPO investors consistently reveal more information compared to traditional bookbuilding, and for experienced investors the difference in information revelation between the two mechanisms becomes even more pronounced. The underpricing (and its volatility) is also significantly lower for the newly introduced methodology.
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