Auctions : Will they eliminate traditional underwriting inefficiencies ? Sara McDonald HEC , University of Lausanne MBF

Initial Public Offerings (IPOs) in the United States have been mainly underwritten and sold using the bookbuilding method; a method inherently riddled with inefficiencies and information asymmetries. Consequently, IPOs in the U.S. (and other countries for that matter) have been persistently underpriced, at the expense of both the issuing firm and public investors. Alternative underwriting procedures, such as auctioning methods, have been proposed in various countries and have resulted in better pricing. The dominant auctioning method used for underwriting has been the sealed-bid uniform price/market-clearing auction1, where the share price is the lowest price at which supply (the number of shares issued) equals demand. This leads us to the question of whether the sealed-bid uniform-price auction is indeed the most efficient auction structure for the sale of IPOs, and more specifically for the sale of IPOs underwritten over the Internet. We define an efficient auction as one whose pricing mechanism generates a price that is closest to the "market" price. Thus in an IPO auction shares priced in an efficient auction would show a smooth transition onto the market and there would be no abnormal returns on the first trading day. Drawing on auction theory and simulation results, this paper shows that the uniform-price auction is indeed the most efficient auction for the sale of IPOs. We develop our reasoning by analyzing two main auctioning 1 Note that financial practitioners refer to it as a Dutch auction, while economists call it an English auction. Thus for this paper we will refer to it simply as a uniform -price auction.