Global trends in IPO methods: Book building versus auctions with endogenous entry

The U.S. book-building method has become increasingly popular for initial public offerings (IPOs) worldwide over the last decade, whereas sealed-bid IPO auctions have been abandoned in nearly all of the many countries in which they have been tried. I model book building, discriminatory auctions, and uniform price auctions in an environment in which the number of investors and the accuracy of investors’ information are endogenous. Book building lets underwriters manage investor access to shares, allowing them to reduce risk for both issuers and investors and to control spending on information acquisition, thereby limiting either underpricing or aftermarket volatility. Because more control and less risk are beneficial to all issuers, the advantages of book building's allocational flexibility could explain why global patterns of issuer choice are surprisingly consistent. My models also predict that offerings with higher expected underpricing have lower expected aftermarket volatility; that an auction open to large numbers of potential bidders is vulnerable to inaccurate pricing and to fluctuations in the number of bidders; and that both book-built and auctioned IPOs will exhibit partial adjustment to both private and public information.     

Sovereign debt auctions: Uniform or discriminatory?

Many financial assets, especially government bonds, are issued by an auction. An important feature of the design is the auction pricing mechanism: uniform versus discriminatory. Theoretical papers do not provide a definite answer regarding the dominance of one type of auction over the other. We investigate the revealed preferences of the issuers by surveying the sovereign issuers that conduct auctions. We find that the majority of the issuers/countries in our sample use a discriminatory auction mechanism for issuing government debt. We use a multinomial logit procedure and discriminatory analysis to investigate the mechanism choice. It was interesting to find that market-oriented economies and those that practice common law tend to use a uniform method while economies who are less market oriented and practice civil law tend to use discriminatory price auctions.     

Auctions versus book-built IPOs in Japan: A comparison of aftermarket volatility

In a recent theoretical paper, Sherman [Sherman, A.E., 2005, Global trends in IPO methods: Book building versus auctions with endogenous entry, Journal of Financial Economics 78, 615–649.] proposes that: “If book building leads to greater expected underpricing relative to uniform price or discriminatory auctions, then it should also lead to less volatility in aftermarket trading…”. In this paper, we study a Japanese sample and find that book-built IPOs exhibit greater underpricing and higher aftermarket volatility compared to price-discriminatory auctions. Aftermarket volatility wanes with seasoning in both sub-samples, but the book-built volatility levels are persistently higher than those for auctions for as long as one year after the IPO issue date.     

Tacit collusion and capacity withholding in repeated uniform price auctions

This article analyzes tacit collusion in infinitely repeated multiunit uniform price auctions in a symmetric oligopoly with capacity‐constrained firms. Under two popular definitions of the uniform price, when each firm sets a price‐quantity pair, perfect collusion with equal sharing of profit is easier to sustain in the uniform price auction than in the corresponding discriminatory auction. Moreover, capacity withholding may be necessary to sustain this outcome. Even when firms may set bids that are arbitrary finite step functions of price‐quantity pairs, in repeated uniform price auctions maximal collusion is attained with simple price‐quantity strategies exhibiting capacity withholding.     

Auctions vs. Bookbuilding and the Control of Underpricing in Hot IPO Markets

Market returns before the offer price is set affect the amountand variability of initial public offering (IPO) underpricing.Thus an important question is "What IPO procedure is best adaptedfor controlling underpricing in "hot" versus "cold" market conditions?"The French stock market offers a unique arena for empiricalresearch on this topic, since three substantially differentissuing mechanisms (auctions, bookbuilding, and fixed price)are used there. Using 1992–1998 data, we find that theauction mechanism is associated with less underpricing and lowervariance of underpricing. We show that the auction procedure'sability to incorporate more information from recent market conditionsinto the IPO price is an important reason.     

Strategic Behavior and Underpricing in Uniform Price Auctions: Evidence from Finnish Treasury Auctions

We contribute to the debate on the optimal design of multiunit auctions by developing and testing robust implications of the leading theory of uniform price auctions on the bid distributions submitted by individual bidders. The theory, which emphasizes market power, has little support in a data set of Finnish Treasury auctions. A reason may be that the Treasury acts strategically by determining supply after observing bids, apparently treating the auctions as a repeated game between itself and primary dealers. Bidder behavior and underpricing react to the volatility of bond returns in a way that suggests bidders adjust for the winner's curse.     

Strategic design under uncertain evaluations: structural analysis of design‐build auctions

I investigate firms' competition over price and product design under uncertain design evaluations in the context of Design‐Build (DB) auctions. Reviewers' design evaluations contain uncertainty from a bidder's perspective, leading luck to dampen differences in the firms' chances of winning. I model bidders' behavior and show semiparametric identification of the model primitives. Uncertain design evaluations increase the expected price of design quality and exacerbate an auctioneer's uncertainty in auction outcomes. These effects are mostly due to changes in bidding strategies. Bid ranking swaps due to uncertain evaluations account for a small share of these effects.     

Auction Price Formation with Costly Occupants: Evidence Using Data from the Osaka District Court

Foreclosure properties sold at Japanese judicial auctions are delivered to buyers with an unclear title when occupants exist, because the foreclosure laws protect occupants from compulsory execution of auctions. The existence of occupants theoretically affects the auction price through two channels. First, it affects the reserve price, and this changes in auction price. Second, the number of bidders changes in response to changes in the reserve price that is controlled by occupants, and this changes the auction price. Using data from the Osaka District Court, we empirically find that the existence of occupants in properties reduces the auction price through two channels.     

Designing electricity auctions

Motivated by the new auction format in the England and Wales electricity market, as well as the recent debate in California, we characterize bidding behavior and market outcomes in uniform and discriminatory electricity auctions. Uniform auctions result in higher average prices than discriminatory auctions, but the ranking in terms of productive efficiency is ambiguous. The comparative effects of other market design features, such as the number of steps in suppliers' bid functions, the duration of bids, and the elasticity of demand are analyzed. We also consider the relationship between market structure and market performance in the two auction formats.     

Strategic bidding in multi‐unit auctions with capacity constrained bidders: the New York capacity market

This article employs a simple model to describe bidding behavior in multi‐unit uniform price procurement auctions when firms are capacity constrained. Using data from the New York City procurement auctions for power generating capacity, I find that firms use simple bidding strategies to coordinate on an equilibrium that extracts high rents for all bidders. I show theoretically and empirically that the largest bidder submits the auction clearing bid. All other bidders submit inframarginal bids that are low enough to not be profitably undercut. Inframarginal bidders decrease their bids as the pivotal firm's capacities and its profits of undercutting increase.     

Bounds on revenue distributions in counterfactual auctions with reserve prices

Measuring auction revenues under counterfactual reserve prices or formats requires knowledge of distributions of bidders' values and private signals. This poses a challenge when bids are observed from first‐price, common‐value auctions. I bound counterfactual revenue distributions without imposing parametric restrictions on the model structure. Using data from U.S. municipal bond auctions, I find first‐price and second‐price auctions under optimal reserve prices lead to little improvement in revenues over existing first‐price formats. The number of bidders has a more significant impact on revenues in optimal auctions. I also find invoking an incorrect assumption of private values in counterfactual analyses results in small errors in predicting revenues from optimal second‐price auctions.     

Multiple Unit Auctions and Short Squeezes

This article develops a theory of multiunit auctions where shortsqueezes can occur in the secondary market. Both uniform anddiscriminatory auctions are studied and bidders can submit multiplebids. We show that bidders with short and long preauction positionshave different valuations in an otherwise common value setting.Discriminatory auctions lead to more short squeezing and higherrevenue than uniform auctions, ceteris paribus. Asymptotically,as the auction size approaches infinity, the two formats leadto equivalent outcomes. Shorts employ more aggressive equilibriumbidding strategies. Most longs strategically choose to be passive.Free riding on a squeeze by small, long players has no impacton these results, but affects revenue in discriminatory auctions.     

IPO auctions and private information

IPO auctions, which provide an impartial way of determining IPO pricing and share allocations, offer a natural setting for examining whether institutional investors possess private information, and for measuring how valuable their information is. Analyzing detailed bidding data from Taiwan’s discriminatory (pay-as-bid) auctions, we find that, relative to retail investors, institutional investors tend to bid higher in auctions when IPO shares are more valuable, and that underpricing is larger in auctions with relatively higher institutional bids. These results imply that institutional investors are better informed about IPO value, and that they obtain higher information rents when they bid higher relative to retail investors. We estimate the value of institutional investors’ private information to be worth about 8.68% of return, which is the extra rate of return they command on their informational advantages over retail investors.     

Bidding into the Red: A Model of Post-Auction Bankruptcy

This paper investigates auctions where bidders have limited liability. First, we analyze bidding behavior under different auction formats, showing that the second‐price auction induces higher prices, higher bankruptcy rates, and lower utilities than the first‐price auction. Second, we show that the cost of bankruptcy critically affects the seller's preference over the choice of auction. If bankruptcy is very costly, the seller prefers the first‐price auction over the second‐price auction. Alternatively, if the bankrupt assets are resold among the losers of the initial auction, the seller prefers the second‐price auction.     

Buy‐out prices in auctions: seller competition and multi‐unit demands

Online auction sites often enable sellers to add a buy‐out price. In one‐shot auctions, this has been motivated by appeal to impatience or risk aversion. We offer additional justification in a dynamic model, by showing that an early seller has an incentive to use a buy‐out price, if a similar product is offered later by another seller, and bidders desire multiple objects. Revenue in the first auction increases, but revenue in the second auction decreases, as does the sum of revenues. The buy‐out price causes the auction sequence to become inefficient, because the first item may be awarded to a bidder who should have received none.     

Auctions versus bookbuilding: The effects of IPO regulation in Japan

We analyze a regulatory change in the Japanese IPO market that created an abrupt shift from hybrid price-discriminatory auctions to bookbuilding. We find that bookbuilding leads to higher underpricing than hybrid price-discriminatory auctions. Furthermore, we find evidence that price accuracy tends to be higher for auctions than for bookbuilding. The results hold under a variety of OLS specifications and with regression discontinuity designs exploiting the abrupt change of the regulation.     

Underpricing and Market Power in Uniform Price Auctions

In uniform auctions, buyers choose demand schedules as strategiesand pay the same "market clearing" price for units awarded.Despite the widespread use of these auctions, the extant theoryshows that they are susceptible to arbitrarily large underpricing.We make a realistic modification to the theory by letting prices,quantities, and bids be discrete. We show that underpricingcan be made arbitrarily small by choosing a sufficiently smallprice tick size and a sufficiently large quantity multiple.We also show how one might improve revenues by modifying theallocation rule. A trivial change in the design can have a dramaticimpact on prices. Our conclusions are robust to bidders beingcapacity constrained. Finally, we examine supply uncertaintyrobust equilibria.     

Not knowing the competition: evidence and implications for auction design

In a government auction program where first-price auctions generate significantly higher revenue than English auctions, I document evidence that bidders are uncertain about the number of auction entrants. Motivated by additional data evidence, I estimate a structural model of auctions in which rivals' participation is stochastic, allowing for bidders' risk aversion and asymmetry. Counterfactual simulations reveal that bidders' uncertainty about the number of entrants, combined with risk aversion, substantially softens the revenue impact of low competition in first-price auctions. This explains the observed revenue patterns and uncovers an empirically important reason for sellers to favor first-price auctions over English auctions.     

Regulating bidder participation in auctions

Regulating bidder participation in auctions can potentially increase efficiency compared to standard auction formats with free entry. We show that the relative performance of two such mechanisms, a standard first‐price auction with free entry and an entry rights auction, depends nonmonotonically on the precision of information that bidders have about their costs prior to deciding whether to participate in a mechanism. As an empirical application, we estimate parameters from first‐price auctions with free entry for bridge‐building contracts in Oklahoma and Texas and predict that an entry rights auction increases efficiency and reduces procurement costs significantly.     

An empirical study of auction revenue rankings: the case of municipal bonds

Using a novel dataset of 386 first‐price municipal bond auctions held in California, I perform counterfactual revenue comparisons, based on the theoretical result of Milgrom and Weber (1982). I show that the revenue in the second‐price auction is nonparametrically identified, and the counterfactual revenue in the English auction can be bounded in an informative way. These results form a basis for nonparametric estimation of counterfactual revenue differences. I find that the revenue gain from using the English auction would be in the range of 11%—19% of the gross underwriting spread, and that most of it would already be captured by using the second‐price auction. The recent explosive growth of Internet English auctions, administered by Grant Street Group, provides external support to the claim that auction design matters in this market.