Initial public offering mechanisms (Japan, Israel)

This dissertation investigates mechanisms used to conduct initial public offerings (IPOs) of common stock. Using data from the United States, Japan, and Israel I compare the book-building mechanism used in the United States, the discriminatory price auction mechanism used in Japan, and the uniform price auction mechanism used in Israel. I find that underpricing is higher under book-building than under auctions, even after attempting to control for market conditions, firm size, lead underwriter and information gathered. I also find that higher underpricing is associated with less pricing accuracy in the United States and that US IPO aftermarket prices are less accurate than Japanese prices, using both aftermarket volatility and long run returns as indicators of accuracy.; I also compare two commonly used auction mechanisms, the uniform price and the discriminatory price auction. I evaluate discriminatory price auctions in Japan and uniform price auctions in Israel on the basis of underpricing, demand elasticity and price adjustment to demand and test a number of divisible good auction theory implications. I find evidence that the winner's curse decreases elasticity and limits price adjustment to demand and is associated with underpricing in Japan's discriminatory price auctions, while strategic bidding seems to increase underpricing and decrease elasticity in Israel's uniform price auctions. My results are consistent with divisible good auction theory.; Finally, I investigate empirically the use of a maximum price in Japan's discriminatory price IPO auctions. Auction theory does not address the seller's setting of a maximum price. I compare auction outcomes in the period when the maximum price was required to the subsequent period when it was not required. I find that underpricing and bidder sensitivity to the winner's curse appear to be highest just after changes in the IPO format—after auctions were introduced and after the maximum price requirement was eliminated. The reaction to the elimination of the maximum price is unexpected because bidders may have been able to infer what the maximum price would have been from other publicly available information.