How should a firm go public? A dynamic model of the choice between fixed-price offerings and auctions in IPOs and privatizations

Thomas J. Chemmanur; Mark H. Liu

doi:10.1093/rcfs/cfy006

How should a firm go public? A dynamic model of the choice between fixed-price offerings and auctions in IPOs and privatizations

Thomas J. Chemmanur, Mark H. Liu

Finance and Quantitative Methods

Research output: Contribution to journal › Article › peer-review

1 Scopus citations

Abstract

We analyze the choice between fixed-price offerings and auctions in IPOs and privatizations. We model a firm going public by selling equity in the IPO market. Firm insiders have private information about intrinsic firm value, but outsiders can produce information about this value before bidding for shares. Inducing information production is beneficial for higher intrinsic value firms, because this information, reflected in secondary market prices, yields higher equity prices. We show that auctions and fixed-price offerings have different properties for inducing information production, solve for the equilibrium IPO mechanisms for firms with different characteristics, and explain the “IPO auction” puzzle.

Original language	English
Pages (from-to)	42-96
Number of pages	55
Journal	Review of Corporate Finance Studies
Volume	8
Issue number	1
DOIs	https://doi.org/10.1093/rcfs/cfy006
State	Published - Mar 1 2019

Bibliographical note

Funding Information:
*Thomas Chemmanur acknowledges support from a Boston College Faculty Research Summer Grant. Mark Liu acknowledges partial financial support from the Ewing Marion Kauffman Foundation. For helpful comments and discussions, we thank Patrick Bolton, Alon Brav, Hsuan-Chi Chen, Edward Kane, Bill Megginson, Tom Noe, and Jay Ritter and seminar participants at Baruch College, Boston College, Tulane University, Suffolk University, SUNY Binghamton, University of Kentucky, the NTU Finance Conference, the European Summer Symposium in Financial Markets at Gerzensee, the Financial Management Association Meetings, the Econometric Society Winter Meetings (joint with the ASSA), and the European Finance Association Meetings. We alone are responsible for any errors or omissions. Send correspondence to Thomas Chemmanur, Boston College, 336 Fulton Hall, Chestnut Hill, MA 02167; telephone: 1-617-552-3980. E-mail: chemmanu@uky.edu.

Publisher Copyright:
© The Author(s) 2018. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For permissions, please e-mail: journals.permissions@oup.com.

ASJC Scopus subject areas

Economics and Econometrics
Finance
Business and International Management

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abstract = "We analyze the choice between fixed-price offerings and auctions in IPOs and privatizations. We model a firm going public by selling equity in the IPO market. Firm insiders have private information about intrinsic firm value, but outsiders can produce information about this value before bidding for shares. Inducing information production is beneficial for higher intrinsic value firms, because this information, reflected in secondary market prices, yields higher equity prices. We show that auctions and fixed-price offerings have different properties for inducing information production, solve for the equilibrium IPO mechanisms for firms with different characteristics, and explain the “IPO auction” puzzle.",

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note = "Funding Information: *Thomas Chemmanur acknowledges support from a Boston College Faculty Research Summer Grant. Mark Liu acknowledges partial financial support from the Ewing Marion Kauffman Foundation. For helpful comments and discussions, we thank Patrick Bolton, Alon Brav, Hsuan-Chi Chen, Edward Kane, Bill Megginson, Tom Noe, and Jay Ritter and seminar participants at Baruch College, Boston College, Tulane University, Suffolk University, SUNY Binghamton, University of Kentucky, the NTU Finance Conference, the European Summer Symposium in Financial Markets at Gerzensee, the Financial Management Association Meetings, the Econometric Society Winter Meetings (joint with the ASSA), and the European Finance Association Meetings. We alone are responsible for any errors or omissions. Send correspondence to Thomas Chemmanur, Boston College, 336 Fulton Hall, Chestnut Hill, MA 02167; telephone: 1-617-552-3980. E-mail: chemmanu@uky.edu. Publisher Copyright: {\textcopyright} The Author(s) 2018. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For permissions, please e-mail: journals.permissions@oup.com.",

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How should a firm go public? A dynamic model of the choice between fixed-price offerings and auctions in IPOs and privatizations

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Bibliographical note

ASJC Scopus subject areas

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