Auction-Based IPOs

In a recent journal article, titled "Legal Institutions and IPO Puzzles," authors Ruoying Chen and Saul Levmore, address IPO underpricing. In some jurisdictions, including in the United States, there have been some IPOs structured as auctions. Presumably, an auction methodology would address the underpricing experienced in IPOs that rely on book building and would have gained in popularity. However, the authors observe that, but for some limited cases, auctions did not reduce IPO underpricing. Auctions require bidders to acquire more information than they otherwise would be required to obtain in a traditional IPO. This information may be difficult or expensive to acquire. As a result, an auction would not address lack of transparency or access to information. Although an auction might eliminate agency costs associated with IPO underwriters, an auction would impose comparable cost on buyers who, as a result, decline to participate or require an even lower initial