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Why Do IPO Auctions Fail?

From Kellogg School of Management at Northwestern University


This particular article discusses the role that auction theory plays within IPOs when firms such as Google take a nontraditional approach. Though IPO auctions are rare, it appears Google took this approach back in 2004 when it used a Dutch auction to determine who gets to buy how many shares and what prices to set. This article specifically explores why IPOs auctions are the less popular approach, and some of the reasons that taking the more traditional approach with an investment bank might be better. It was incredibly interesting to think about the auction theory we learned in class being applied to a direct, everyday example, especially one with a company as large as Google.


Some of the reasons that paper explores, includes how the unpredictable variations in both the number and types of investors/bidders, make this option much less appealing than the traditional path. In class, we minimally explored how a bidder’s personality and characteristics can affect an auction, but it’s interesting to see here how much of a role it can play in real life. In addition, it was intriguing to evaluate how issues such as the free rider problem and the winner’s curse can affect a real Dutch auction. For free rider, the authors discussed how certain people rely on others to get information about the stock without volunteering any of their own, while through the winner’s curse, winners of auctions sometimes end up overbidding and find it hard to adjust their own bids due to the volatility and instability of a real-life auction.


Moreover, external pressures such as the pressure from investment banks for companies to bookbuild in their own self-interest and how that can affect the appeal of an auction is definitely something not explored within class. It’s very intriguing to compare how the theory of an auction in class relies on a somewhat dependable and perfect market with bidders whose behavior is somewhat predictable. This article directly applies auction theory to the real-life example of IPOs, and very engagingly explores how this situation is rarely representative of what we see in everyday life, and how the theory and pressures of real life intertwine together to give us an event such as the Google IPO.


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October 2018