Information Production and Biddingin IPOs -An Experimental Analysis of Auctionsand Fixed-Price Offerings

Despite their theoretical efficiency in selling shares to the public, auctions are not thepreferred mechanisms of issuers in Initial Public Offerings (IPOs). Chemmanur and Liu(2006) [WP] and Sherman (2005) [JFE 78, 615-649] provide a rational explanation for this“IPO auction puzzle”. They argue that issuers are not only interested in maximizing theoffering proceeds, but also care about the secondary market price and thus try to induce manyinvestors to produce information about the IPO. In fixed-price or bookbuilding offerings theissuer might opt to set an offering price that suggests underpricing in order to compensateinvestors for producing costly information. In auctions, however, competitive biddingimpedes underpricing, which in turn lowers the incentive to produce information about theIPO in the first place. In this paper, we report an experimental study that was set up to test themechanisms underlying this reasoning.[...]