Title

The Dutch Auction Myth

Abstract

The initial public offering process is under assault. Critics of this process have woven a complex set of interconnected objections to the orthodox method for conducting IPOs, pricing of shares, and allocating them to preferred investors. These critics instead point to online auctions as an alternative IPO method that can provide more equitable access, efficient prices, and egalitarian allocations. These claims rest on Google’s recent IPO and W.R. Hambrecht + Co.’s OpenIPO mechanism, conventionally regarded as impure variants of what is known as a descending-bid or Dutch auction (Dutch IPO).

This article assesses the empirical and theoretical case for Dutch IPOs. Google’s IPO featured peculiarities that delimit its utility as a case study. Instead this article novelly presents underpricing data on all OpenIPOs, as well as data about a French variant known as the Mise en Vente. The results fail to vindicate Dutch IPO supporters’ primary claims, which perilously rely upon observations from the anomalous two-year internet bubble period. Moreover, economic and financial analyses of Dutch IPOs reveal ways in which they may be susceptible to fraud that bookbuilding is not. Ultimately, claims of the Dutch IPO's superiority over bookbuilding at best are unproven and at worst fail to appreciate certain risks.

Disciplines

Agency | Banking and Finance Law | Business Organizations Law | Economics | International Law | Law and Economics | Litigation | Organizations Law | Securities Law

Date of this Version

March 2006