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Open AccessArticle

Towards an Optimal IPO Mechanism

Faculty of Business and Economics, Amsterdam University of Applied Sciences, 1102 CV Amsterdam, The Netherlands
J. Risk Financial Manag. 2020, 13(6), 115; https://doi.org/10.3390/jrfm13060115
Received: 13 May 2020 / Revised: 29 May 2020 / Accepted: 2 June 2020 / Published: 4 June 2020
(This article belongs to the Special Issue Entrepreneurial Finance, Innovation and Technology)
Concerns about the negative consequences of the excessive underpricing of the current arrangement in the initial public offering (IPO) market for the provision of entrepreneurial finance—book building—have led to research into the viability of auctions for IPO pricing and allocation. IPO firms face a trade-off between the benefit of accurate and reliable IPO price discovery and the cost of underpricing. The main aim of this paper was to gain new scientific knowledge about this trade-off by measuring the impact of two key variables on this trade-off: capacity restraint and discount on the auction clearing price. Using controlled experiment methodology in multi-unit uniform price auctions we found that the most capacity-restricted auctions that also offer investors a discount are likely to produce the most accurate and reliable price discovery and consequently, the most predictable auction outcome. There are indications that a discount of 8% may suffice to incentivize investors to reliably contribute to price discovery. The resulting underpricing (and its variability) of these auctions is likely to be significantly lower than if book building would be used to price and allocate IPOs. Technological innovation in the IPO market through the application of recent advances in data science, experimental economics and artificial intelligence allows for the optimization of IPO mechanisms and crowdfunding platforms which in turn improves the access to equity required for entrepreneurial finance. View Full-Text
Keywords: entrepreneurial finance; IPO; auction; price discovery; underpricing entrepreneurial finance; IPO; auction; price discovery; underpricing
MDPI and ACS Style

Huibers, F.E. Towards an Optimal IPO Mechanism. J. Risk Financial Manag. 2020, 13, 115.

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