An empirical analysis of the efficiency of online auction IPO processes and traditional IPO processes

Abstract

Purpose -The purpose of this paper is to examine whether the online auction mechanism in the USA is more effective at pricing initial public offerings (IPOs) than the traditional book building process. Design/methodology/approach -The analysis compares the performance of online auction IPOs with traditional IPOs issued in the same industry area and in the same year to assess the differences in first day mispricing and its persistence. The paper compares the characteristics of firms choosing the auction process relative to the traditional process. It also uses regression models to examine whether online auction IPOs had a significantly lower first day price increase than traditional IPOs. Findings -The results indicate that for 60 percent of the auction IPOs, over 40 percent of the traditional IPOs issued in that year and in that three-digit Standard Industry Classification (SIC) area had greater mispricing. The mispricing of online auction IPOs relative to traditional IPOs persist over time for 50-80 percent of online auction IPOs. Regression analyses controlling for industry effects, year effects, size of the issue, and type of traditional underwriter (low, medium, and high volume underwriters) suggest that the auction's first day price surges are not significantly lower than those of traditional underwriters. Moreover, high volume traditional underwriters have statistically significantly higher first day price surges than low volume traditional underwriters, supporting the theory that they intentionally misprice to benefit their preferred clients. Firms choosing the auction process tend to be smaller in terms of the number of shares of their IPO and their annual sales than firms choosing the traditional IPO process. There is some overlap in industry sector and age, although this varies by year. Originality/value -This paper suggests that the auction process may not be as efficient in pricing IPOs as was initially intended and that there are opportunities for further innovation and improvement.

A, B or C? Experimental Tests of IPO Mechanisms

“…On the other hand, several papers (Engelmann and Grimm, ; Kagel et al , , Kagel and Levin, ; Manelli et al , ) test the predictions of the Ausubel mechanism but no evidence exists in a IPO environment. Furthermore, the only recent significant cases of auction‐based IPO have been Google, which adopted a modified Dutch‐auction approach, and a few companies adopting standard uniform price clock‐auctions (Hensel, ; Degeorge et al , ). Despite hints of good results offered by recent alternative mechanisms, the limited empirical evidence calls for further testing.…”

Correlation with Internet Finance and Residence Consumption

“…Liu [13] believed that the network economy is built on the basis of the information internet of modern communications internet. Through the computer' Internet, the economic activities to form a whole.…”

A, B or C? Experimental Tests of IPO Mechanisms

“…On the other hand, several papers (Engelmann and Grimm, 2009;Kagel et al, 2001, Kagel andLevin, 2001;Manelli et al, 2001) test the predictions of the Ausubel mechanism but no evidence exists in a IPO environment. Furthermore, the only recent signi…cant cases of auction-based IPO have been Google, which adopted a modi…ed Dutch-auction approach, 5 and few companies adopting standard uniform price clock-auctions (Hensel, 2009;Degeorge et al, 2010). Despite hints of good results o¤ered by recent alternative mechanisms, the limited empirical evidence calls for further testing.…”