Empirical research has provided extensive evidence on the inefficiency of bookbuilding in controlling underpricing. Both academics and practitioners have investigated this phenomenon proposing innovative offering methodologies. In this paper we explore the information revelation and underpricing properties of two baseline models, uniform auctions and bookbuilding, and two newly proposed mechanisms, Ausubel auction and Competitive IPO. Our findings confirm the empirical weaknesses of bookbuilding and provide hints that standard auctions may stimulate less bidding. However, (a) the Competitive IPO features increase competition both among banks and among investors resulting in more information revelation and less underpricing than standard bookbuilding; and (b) the Ausubel auction yields superior price discovery and underpricing outcomes than uniform clock auction and bookbuilding. Our experimental results provide novel insights to the ongoing debate on optimal equity offering mechanisms, suggesting that the solution to current issuing methodologies shortcomings may require the development of a "hybrid" procedure blending properties of existing and new mechanisms.
A,B, or C? Experimental tests of IPO mechanisms
BONINI, STEFANO;VOLOSHYNA, OLENA
2013
Abstract
Empirical research has provided extensive evidence on the inefficiency of bookbuilding in controlling underpricing. Both academics and practitioners have investigated this phenomenon proposing innovative offering methodologies. In this paper we explore the information revelation and underpricing properties of two baseline models, uniform auctions and bookbuilding, and two newly proposed mechanisms, Ausubel auction and Competitive IPO. Our findings confirm the empirical weaknesses of bookbuilding and provide hints that standard auctions may stimulate less bidding. However, (a) the Competitive IPO features increase competition both among banks and among investors resulting in more information revelation and less underpricing than standard bookbuilding; and (b) the Ausubel auction yields superior price discovery and underpricing outcomes than uniform clock auction and bookbuilding. Our experimental results provide novel insights to the ongoing debate on optimal equity offering mechanisms, suggesting that the solution to current issuing methodologies shortcomings may require the development of a "hybrid" procedure blending properties of existing and new mechanisms.
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