Why Do IPO Auctions Fail?
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Finance & Accounting Entrepreneurship May 1, 2007

Why Do IPO Auctions Fail?

‘Free riders’ and the ‘winner’s curse’ can lead to less-than-desirable outcomes. But some auction features can lend transparency to the traditional IPO approach.

Based on the research of

Ravi Jagannathan

Ann E. Sherman

When Google successfully launched its initial public offering (IPO) by auction in 2004, there was much media and industry fanfare. In reality, using an IPO auction to determine who gets to buy how many shares at what price is an old approach that either never took off in some countries, or has gone out of fashion in others. IPO auctions were attempted in more than twenty countries in the 1980s and early 1990s, but are rare today.

Google’s high-profile IPO did not alter the trend: only three of more than 250 U.S. IPOs in the twelve months that followed were conducted using auctions. Why is this so?

Featured Faculty

CME Group/John F. Sandner Professor of Finance; Co-Director, Financial Institutions and Markets Research Center

About the Writer

Sng, Tuan Hwee, a doctoral student in the Economics Department at the Weinberg College of Arts and Sciences, Northwestern University.

About the Research

Jagannathan, Ravi and Ann E. Sherman (2006). “Why Do IPO Auctions Fail?” NBER Working Paper No. 12151

Jagannathan, Ravi and Ann E. Sherman (2005). “Reforming the Bookbuilding process for IPOs.” Journal of Applied Corporate Finance, 17(1): 67–72

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