Why Don't IPO Firms Disclose A Reserve Price?: Secret Reservation Prices In A Divisible Good Auction

Topics:
IPO
Tags:
Auction,
Finance,
Financial Planning,
Financial Services,
Investment,
IPO,
University Of Western Ontario
Source:
University of Western Ontario

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Overview: A significant proportion of IPOs (Initial Public Offering) filed with the SEC are withdrawn during bookbuilding when it becomes clear to the issuer that they will not achieve a minimum acceptable offer price. Why don't issuers disclose this price at the outset? This question is important given that in many auction designs, including some for IPOs in other countries, a reserve price is formally posted, and the auction literature has shown that posting a reserve price can be optimal. We explain why the firms that would benefit from the disclosure of a reserve price are those least likely to file for an IPO in the first place and, consequently, why firms that do file are not observed to announce a reserve price. Our results have implications for issuing.

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Format: PDF | Size: 617KB | Date: Nov 2006 | Pages: 47

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