Why Don't Ipo Firms Disclose a Reservation Price?

A significant proportion of IPOs filed with the SEC are withdrawn during bookbuilding when it becomes clear to the issuer that they will not achieve their minimum acceptable offer price. Why don't issuers disclose this price at the outset? This question is important given that in many auction designs, including some for IPOs in other countries, a reserve price is formally posted, and the auction literature has shown that posting a reserve price can be optimal. In a standard bookbuilding framework, we investigate how reservation price uncertainty affects investor incentives to reveal information and, in turn, the amount of underpricing required to elicit 'truthful' indications of interest. We characterize the firms that would enjoy higher proceeds with non-disclosure of reservation prices and the firms that would be better off under a policy of disclosure. We explain why firms in the latter group are those least likely to file for an IPO in the first place and, consequently, why secrecy in reservation prices is normal practice. Our results have implications for regulators of primary equity markets where bookbuilding or economically equivalent selling mechanisms are used