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COME ON IN, THE WATER'S FINE! AN EXPERIMENTAL EXAMINATION OF HYBRID IPO AUCTIONS WITH A PUBLIC POOL
Author(s) -
Schnitzlein Charles R.,
Shao Minjie,
Sherman Ann E.
Publication year - 2019
Publication title -
journal of financial research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.319
H-Index - 49
eISSN - 1475-6803
pISSN - 0270-2592
DOI - 10.1111/jfir.12169
Subject(s) - initial public offering , common value auction , equity (law) , incentive , underwriting , tranche , business , volatility (finance) , economics , microeconomics , monetary economics , finance , political science , law
We offer experimental and theoretical evidence that auction methods for initial public offerings (IPOs) in the United States may be improved through hybrids that include a separate retail tranche or “public pool.” The multi‐unit uniform price auctions in our laboratory experiments incorporate key IPO features including endogenous entry, costly information acquisition, and differing capacity constraints. As predicted, hybrids increase proceeds and reduce price volatility, price error, and the incentive for small bidders to free ride. Underpricing occurs in both treatments but is attenuated with the public pool. Our results imply that both IPO auctions and equity crowdfunding/crowdinvesting should include separate, non‐price‐setting tranches for the general public.