Underpricing, Bookbuilding and Competitive IPO: an Experimental Analysis

The investigations in the beginning of the 2000s of the IPOpractices following dot.com bubble have spurred hot debates among regulators as well as academics about the issuing methods most widely adopted. The discussion about the superiority of one or another traditional IPOmechanism in controlling the underpricing is still largely open, although practitioners have started actively developing and implementing novel mechanisms. In 2004 two large IPOshave been conducted through non-traditional methods: Dutch auction(Google) and a pioneering method named “competitive IPO” (Pages Jaunes). The present paper investigates the investors’ behavior in competitive IPO, in particular, we stipulate that this method increases competition not only among banks but also among investors resulting in more information revelationand less underpricing compared to traditional bookbuilding. We adopt an experimental methodology approach to deal with the lack of reliable field data. Our results show that in competitive IPOinvestors consistently reveal more information compared to traditional bookbuilding, and for experienced investors the difference in information revelationbetween the two mechanisms becomes even more pronounced. The underpricing (and its volatility) is also significantly lower for the newly introduced methodology.