Why Dutch Auctions are not good for IPOs.
In the article, Efficiency in IPO Issuance Processes? Published in the Business Economics journal by Nayantara Hensel, The author questions if a Dutch auction is a good business decision for companies issuing their Initial Public Offering. A dutch auction is when an auctioneer starts at a very high price and keeps lowering until a buyer agrees to buy at that price. Some companies, including google, have used this method for their IPOs. This type of auction was intended to minimize a “first day price surge”. This surge means that the prices for stocks are substantially higher on their first day than at the initial offering price, therefore the companies could have priced higher in the case of IPOS and lost money. The article suggests however that dutch auctions are not helpful in lowering these surges: “ Furthermore, a comparison of auction IPOs with traditional IPOs issued in the same year and in the same three-digit SIC code suggests that 44 percent of the auction IPOs have greater first day price surges than their traditional counterparts.”
Given what we have learned in this class about Dutch (descending bid) auctions, sellers should bid a little less than their item value in order to secure their item but still at a slight gain. This strategy could explain the reason for those higher first day price surges in IPOs who use a dutch auction method. Buyers are bidding too far under their value for the stocks, but on the first day the price shoots up reflecting the actual value of the shares in general. This is why Dutch auctions might not be the best option for IPOs and companies should consider other options.
Source:
Efficiency in IPO Issuance Processes:
https://discovery-ebsco-com.proxy.library.cornell.edu/c/u2yil2/viewer/html/jxdw2g7thf
Money Left on the Table in IPOs by Firms:
https://site.warrington.ufl.edu/ritter/files/money-left-on-the-table.pdf