2004, ’’How should a firm go public?’’ A Dynamic Model of the Choice Between Fixed-price Offerings and Auctions in IPOs and Privatizations, working paper

We develop a theoretical analysis of the choice of Þrms between Þxed-price offerings and uniform-price auctions for selling shares in IPOs and privatizations. We consider a setting in which a Þrm goes public by selling a fraction of its equity in an IPO market where insiders have private information about intrinsic Þrm value. Outsiders can, however, produce information at a cost about the Þrm before bidding for shares. Firm insiders care about the extent of information production by outsiders, since this information will be reßected in the secondary market price, giving a higher secondary market price for higher intrinsic-value Þrms. We show that auctions and Þxed-price offerings have different properties in terms of inducing information production. Thus, in many situations, Þrms prefer to go public using Þxed-price offerings rather than IPO auctions in equilibrium. We relate the equilibrium choice between Þxed-price offerings and IPO auctions to various characteristics of the Þrm going public. Unlike the existing literature, our model is able to explain not only the widely-documented empirical Þnding that underpricing is lower in IPO auctions than in Þxed-price offerings (e.g., Derrien andWomack (2000)), but also the fact that, despite this, auctions are losing market share around the world. Our model thu