Efficiency in IPO Issuance Processes?

Abstract

Is the online auction an efficient mechanism for pricing initial public offerings (IPOs)? Its intent was to minimize first day price surges in IPOs, which represented "motley left on the table" for bsuers. Evidence from (ri>ogle's IPO suggests that the online auction process may not have minimized thefiirst day price surge, since 82 percent of the IPOs issued in 2004 using the traditional process experienced less of an increase. Furthermore, a comparison of auction IPOs with traditional IPOs issued in the same year and in the same threedigit SIC code suggests that 44 percent of the auction IPOs have greater first day price surges than their traditional counterparts. A broader comparison of the pricing behavior of auction IPOs with traditional IPOs presents a mixed picture and sngge.st.s that the size of underwriter may be an important Jartor. The mispricing that occurs in auctions tnay be due to an informational asymmetry on the part of small investors. This informational gap could arise because small investors lack access to the information sources that institutional investors have or because companies are not required to provide detailed information in the online process, inasmuch as they don) undergo the rigorous scrutiny of investment banks in the traditional bookbuilding process. This informational gap may be alleviated by the SEC refortns of the '\piiet period^' atid by the issuer providing more detailed information on the uses of the funds.