Why Have IPO Auctions Lost Market Share to Fixed-Price Offers? Evidence from Taiwan

This paper proposes three hypotheses based on stock market conditions to explain why Taiwanese IPO auctions have lost market share to fixed-price offers: the risk-averse issuer hypothesis, the pricing conflict hypothesis, and the demand inelasticity of stocks hypothesis. The risk-averse issuer hypothesis asserts that the relative risk level of auctions increases as the market becomes more volatile, and so risk-averse issuers will avoid an auction. We find support for this hypothesis. As Taiwanese IPO auctions tend to be placed in a stable market, the long-term stable solution tends to be only a few auctions. The pricing conflict hypothesis posits that Taiwanese IPO auctions sometimes serve as a mechanism to resolve the pricing conflict between issuers and underwriters. We argue that a pricing conflict likely arises when the initial returns of recent IPOs have increased and/or the market returns have remained unchanged or have declined, and not under the case of frequent occurrence, for they are more likely to move in the same directions instead of the opposite. We find some weak support for this hypothesis. The demand inelasticity of stocks hypothesis predicts that large IPOs are more likely to be floated with an IPO auction so as to reduce under-pricing pressure. Small IPOs, however, are the norm for Taiwanese IPOs, leading to fewer IPO auctions. We find strong support for this hypothesis