IPO Auctions: English, Dutch, ... French, and Internet

10 BIAIS AND FAUGERON-CROUZET
1. INTRODUCTION
One of the major benefits of public listing on stock exchanges is the rich flow
of information, about the firm’s prospects and the investors’ willingness to hold
its shares, that is reflected in prices and trades in the secondary market. Prior to
the IPO very little such information is available. Consequently, the task of finding
the IPO price is a difficult one. The auction by which the unseasoned shares are
sold can therefore play an important role in eliciting information from the market
participants about their valuation of the stock. Yet IPO auction mechanisms vary
quite significantly across countries, and their ability to elicit information revelation
from investors is likely to also vary (see Loughran et al. (1994) and Sherman
(1999)):
• In the United States and the United Kingdom, in the Book Building method,
the investment banker elicits indications of interest from institutional investors and
uses these indications to set the IPO price and allocate the shares (see Benveniste
and Spindt (1989), Benveniste and Wilhelm (1990 and 1997), Spatt and Srivastava
(1991), Hanley (1993), Hanley and Wilhelm (1993), and Cornelli and Goldreich
(1998)).
• In Singapore, Finland, and the United Kingdom, fixed price offers are used,
whereby investors submit demands at the fixed price, and (possibly random) rationing
rules are used to allocate the shares (see Koh and Walter (1989), Levis
(1990), and Keloharju (1993)).
• In Israel, IPOs are conducted according to the standard uniform price, market
clearing, Dutch auction, whereby the price is set to equate supply and demand (see
Kandel et al. (1997)).
• In the Mise en Vente, an auction-like IPO method commonly used in France,
investors submit limit orders and then the auctioneer sets the price as a function
of aggregate demand (the name of this auction procedure has been recently
changed to Offre a Prix Minimum, but its workings have not been altered). In
this IPO mechanism the price does not clear the market, and prorata rationing
is used. For descriptions and analyses of this IPO method see Belletante and
Palliard (1993), Derrien and Womack (1999), Dubois (1989), Husson and
Jacquillat (1989), Jacquillat and Mac Donald (1974), Jacquillat et al. (1978),
Leleux (1993), and Mirat (1983, 1984).
The diversity of unseasoned shares selling mechanisms has actually even increased
in the recent past as new, internet-based IPO auctions have been recently
proposed (see Wilhelm (1999)):
• Open IPO offers to sell unseasoned shares through a Dutch auction. In its
advertising (for example on its website: www.openipo.com) it emphasizes that
the use of this standard uniform price, market clearing auction ensures that “IPO
offfering prices are set by the market” and reflect “what people are truly willing to
pay for the stock.” It also advises that “investors should make a bid at the maximum