Manipulative Behavior in Auction IPOs
Book-building, the prevailing method for initial public offerings (IPOs), is widely considered flawed, because it results in stock under-pricing. Auction-IPO, on the other hand, is considered, by conventional wisdom, an alternative method that will eliminate the under-pricing. This paper shows how, contrary to customary belief, auction-IPOs may well result in under-pricing. In auction-IPOs, the under-pricing of the stock price is induced by undetected investors’ manipulative strategic behavior. I analyze the requirements for such strategic behavior in a linear model. To reduce investors’ incentive to manipulate their bid in the auction, this paper proposes to restrict auction participants from trading in the aftermarket immediately following the IPO.
Banking and Finance Law | Business Organizations Law | Securities Law
Date of this Version
Mira Ganor, "Manipulative Behavior in Auction IPOs" (April 5, 2006). bepress Legal Series. bepress Legal Series.Working Paper 1235.