A JOINT EXPERIMENTAL ANALYSIS OF INVESTOR BEHAVIOR IN IPO PRICING
               METHODS

ALMEIDA, VINICIO DE SOUZA E; LEAL, RICARDO PEREIRA CÂMARA

doi:10.1590/S0034-759020150103

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FORUM • Rev. adm. empres. 55 (1) • Jan-Feb 2015 • https://doi.org/10.1590/S0034-759020150103 copy

A JOINT EXPERIMENTAL ANALYSIS OF INVESTOR BEHAVIOR IN IPO PRICING METHODS

Análise experimental conjunta do comportamento do investidor em IPOs

Análisis experimental conjunta del comportamiento del inversionista en IPOs

Authorship SCIMAGO INSTITUTIONS RANKINGS

This article jointly examines the differences of laboratory versions of the Dutch clock open auction, a sealed-bid auction to represent book building, and a two-stage sealed bid auction to proxy for the “competitive IPO”, a recent innovation used in a few European equity initial public offerings. We investigate pricing, seller allocation, and buyer welfare allocation efficiency and conclude that the book building emulation seems to be as price efficient as the Dutch auction, even after investor learning, whereas the competitive IPO is not price efficient, regardless of learning. The competitive IPO is the most seller allocative efficient method because it maximizes offer proceeds. The Dutch auction emerges as the most buyer welfare allocative efficient method. Underwriters are probably seeking pricing efficiency rather than seller or buyer welfare allocative efficiency and their discretionary pricing and allocation must be important since book building is prominent worldwide.

Auction; book building; experiment; competitive IPO; IPO

	Students	Professionals	Both
Quantity	38	49	87
Average age in years	25.8	35.7	31.3
Maximum age in years	38	52	52
Minimum age in years	20	21	20
Number of women	11	3	14
Number of men	27	46	73
Number with stock market experience	25	48	73
Average professional experience in years	3.1	10.7	7.3
% undergraduate students	24	0	10
% with bachelor's degree	42	79	63
% with master's degree	34	21	27
Initial return - Dutch auction	-0.64%	1.00%	0.46%
Initial return - "book building"	0.61%	2.77%	1.33%
Initial return - "competitive IPO"	-5.21%	-6.41%	-6.01%
Overall initial return	-1.61%	-1.16%	-1.41%

Panel A - Initial Returns - All Rounds
	Dutch Auction			"Book building"	"Competitive IPO"	All
Mean	0.46%			1.33%	-6.01%	-1.41%
Mean	(0.47)			(1.32)	(-4.88)^* * denotes significance at 1%.	-1.41%
Median	0.38%			0.92%	-5.12%	-1.53%
Median	(0.91)			(0.86)	(0.81)	-1.53%
Standard Deviation	8.22%			8.59%	10.45%	9.67%
Maximum	19.04%			25.14%	17.32%	25.14%
Minimum	-13.38%			-17.75%	-44.99%	-44.99%
# Positive	37			41	16	94
# Negative	35			31	56	122
Panel B - Initial Returns - Last 12 Rounds
Mean		1.62%	-0.12%		-4.67%	-1.06%
Mean		(1.04)	(-0.09)		(-3.26)^* * denotes significance at 1%.	-1.06%
Median		1.89%	0.62%		-5.02%	-1.74%
Median		(0.83)	(0.85)		(0.86)	-1.74%
Standard Deviation		9.39%	7.95%		8.60%	8.99%
Maximum		19.04%	15.66%		14.32%	19.04%
Minimum		-13.38%	-17.75%		-31.87%	-31.87%
# Positive		20	19		8	51
# Negative		16	17		28	57

Panel A - All Rounds
	t test (t statistic)	Wilcoxon test (v statistic)
Dutch Auction vs. Book building	-0.62	-0.48
Book building vs. Competitive IPO	4.61^** Note: “Book building” refers to a sealed bid, uniform price auction, and “competitive IPO” to a two-stage version of it; significance at 10% and 5% denoted by * and **, respectively.	4.05^** Note: “Book building” refers to a sealed bid, uniform price auction, and “competitive IPO” to a two-stage version of it; significance at 10% and 5% denoted by * and **, respectively.
Dutch Auction vs. Competitive IPO	4.13^** Note: “Book building” refers to a sealed bid, uniform price auction, and “competitive IPO” to a two-stage version of it; significance at 10% and 5% denoted by * and **, respectively.	3.85^** Note: “Book building” refers to a sealed bid, uniform price auction, and “competitive IPO” to a two-stage version of it; significance at 10% and 5% denoted by * and **, respectively.
Panel B - Last 12 Rounds
Dutch Auction vs. Book building	0.85	0.79
Book building vs. Competitive IPO	2.33^** Note: “Book building” refers to a sealed bid, uniform price auction, and “competitive IPO” to a two-stage version of it; significance at 10% and 5% denoted by * and **, respectively.	2.38^** Note: “Book building” refers to a sealed bid, uniform price auction, and “competitive IPO” to a two-stage version of it; significance at 10% and 5% denoted by * and **, respectively.
Dutch Auction vs. Competitive IPO	2.96^** Note: “Book building” refers to a sealed bid, uniform price auction, and “competitive IPO” to a two-stage version of it; significance at 10% and 5% denoted by * and **, respectively.	2.47^** Note: “Book building” refers to a sealed bid, uniform price auction, and “competitive IPO” to a two-stage version of it; significance at 10% and 5% denoted by * and **, respectively.

Panel A - All Rounds
	Book building	Competitive IPO	Difference t test
Mean	-8.11%	4.53%	-6.24^** Note: “Book building” refers to a sealed bid, uniform price auction, and “competitive IPO” to a two-stage version of it; significance at 10% and 5% denoted by * and **, respectively.
Median	-2.36%	0.07%
Standard Deviation	28.70%	46.21%
Panel B - Last 12 Rounds
Mean	-6.75%	3.20%	-4.14^** Note: “Book building” refers to a sealed bid, uniform price auction, and “competitive IPO” to a two-stage version of it; significance at 10% and 5% denoted by * and **, respectively.
Median	-1.41%	0.05%
Standard Deviation	30.25%	33.66%

Panel A - All Rounds
	Dutch Auction	Book building	Competitive IPO
Mean	2.26%	-0.22%	-34.21%
Standard Deviation	11.00%	8.32%	17.68%
Maximum	33.37%	17.72%	-7.03%
Minimum	-25.42%	-18.99%	-84.00%

	t test (t statistic)	Wilcoxon test (v statistic)
Dutch Auction vs. Book building	1.52	1.04
Book building vs. Competitive IPO	14.76^** Note: “Book building” refers to a sealed bid, uniform price auction, and “competitive IPO” to a two-stage version of it; significance at 10% and 5% denoted by * and **, respectively.	7.37^** Note: “Book building” refers to a sealed bid, uniform price auction, and “competitive IPO” to a two-stage version of it; significance at 10% and 5% denoted by * and **, respectively.
Dutch Auction vs. Competitive IPO	14.86^** Note: “Book building” refers to a sealed bid, uniform price auction, and “competitive IPO” to a two-stage version of it; significance at 10% and 5% denoted by * and **, respectively.	7.34^** Note: “Book building” refers to a sealed bid, uniform price auction, and “competitive IPO” to a two-stage version of it; significance at 10% and 5% denoted by * and **, respectively.
Panel B - Last 12 Rounds
	Dutch Auction	Book building	Competitive IPO
Mean	3.91%	-0.57%	-35.39%
Standard Deviation	9.23%	8.61%	18.16%
Maximum	33.37%	17.72%	-7.17%
Minimum	-11.20%	-18.99%	-84.00%

	t test (t statistic)	Wilcoxon test (v statistic)
Dutch Auction vs. Book building	2.13^** Note: “Book building” refers to a sealed bid, uniform price auction, and “competitive IPO” to a two-stage version of it; significance at 10% and 5% denoted by * and **, respectively.	1.70^* Note: “Book building” refers to a sealed bid, uniform price auction, and “competitive IPO” to a two-stage version of it; significance at 10% and 5% denoted by * and **, respectively.
Book building vs. Competitive IPO	10.39^** Note: “Book building” refers to a sealed bid, uniform price auction, and “competitive IPO” to a two-stage version of it; significance at 10% and 5% denoted by * and **, respectively.	5.22^** Note: “Book building” refers to a sealed bid, uniform price auction, and “competitive IPO” to a two-stage version of it; significance at 10% and 5% denoted by * and **, respectively.
Dutch Auction vs. Competitive IPO	11.58^** Note: “Book building” refers to a sealed bid, uniform price auction, and “competitive IPO” to a two-stage version of it; significance at 10% and 5% denoted by * and **, respectively.	5.22^** Note: “Book building” refers to a sealed bid, uniform price auction, and “competitive IPO” to a two-stage version of it; significance at 10% and 5% denoted by * and **, respectively.

Panel A - All Rounds
	Dutch Auction	Book building	Competitive IPO
Mean	78.10%	45.20%	31.46%
Standard Deviation	13.34%	31.13%	31.57%
Maximum	99.51%	100.00%	98.04%
Minimum	43.47%	0.00%	0.00%

	t test (t statistic)	Wilcoxon test (v statistic)
Dutch Auction vs. Book building	8.24^** Note: “Book building” refers to a sealed bid, uniform price auction, and “competitive IPO” to a two-stage version of it. Significance at 10% and 5% denoted by * and **, respectively; BWE = [Σ(V-Si)×kqi] / [Σ(V-Sj)×10], where kqi is the allocation of each participating investor i in the round, V is the true value of the offer, and Si is the private signal or assessment of each investor. The offer size is 30 shares and the maximum allocation per investor in each round is 10 shares. In the denominator, j stands for the three investors with the lowest Si, those that would benefit the most from the maximum allocation of 10 shares.	5.95^** Note: “Book building” refers to a sealed bid, uniform price auction, and “competitive IPO” to a two-stage version of it. Significance at 10% and 5% denoted by * and **, respectively; BWE = [Σ(V-Si)×kqi] / [Σ(V-Sj)×10], where kqi is the allocation of each participating investor i in the round, V is the true value of the offer, and Si is the private signal or assessment of each investor. The offer size is 30 shares and the maximum allocation per investor in each round is 10 shares. In the denominator, j stands for the three investors with the lowest Si, those that would benefit the most from the maximum allocation of 10 shares.
Book building vs. Competitive IPO	2.62^** Note: “Book building” refers to a sealed bid, uniform price auction, and “competitive IPO” to a two-stage version of it. Significance at 10% and 5% denoted by * and **, respectively; BWE = [Σ(V-Si)×kqi] / [Σ(V-Sj)×10], where kqi is the allocation of each participating investor i in the round, V is the true value of the offer, and Si is the private signal or assessment of each investor. The offer size is 30 shares and the maximum allocation per investor in each round is 10 shares. In the denominator, j stands for the three investors with the lowest Si, those that would benefit the most from the maximum allocation of 10 shares.	2.71^** Note: “Book building” refers to a sealed bid, uniform price auction, and “competitive IPO” to a two-stage version of it. Significance at 10% and 5% denoted by * and **, respectively; BWE = [Σ(V-Si)×kqi] / [Σ(V-Sj)×10], where kqi is the allocation of each participating investor i in the round, V is the true value of the offer, and Si is the private signal or assessment of each investor. The offer size is 30 shares and the maximum allocation per investor in each round is 10 shares. In the denominator, j stands for the three investors with the lowest Si, those that would benefit the most from the maximum allocation of 10 shares.
Dutch Auction vs. Competitive IPO	11.54^** Note: “Book building” refers to a sealed bid, uniform price auction, and “competitive IPO” to a two-stage version of it. Significance at 10% and 5% denoted by * and **, respectively; BWE = [Σ(V-Si)×kqi] / [Σ(V-Sj)×10], where kqi is the allocation of each participating investor i in the round, V is the true value of the offer, and Si is the private signal or assessment of each investor. The offer size is 30 shares and the maximum allocation per investor in each round is 10 shares. In the denominator, j stands for the three investors with the lowest Si, those that would benefit the most from the maximum allocation of 10 shares.	6.72^** Note: “Book building” refers to a sealed bid, uniform price auction, and “competitive IPO” to a two-stage version of it. Significance at 10% and 5% denoted by * and **, respectively; BWE = [Σ(V-Si)×kqi] / [Σ(V-Sj)×10], where kqi is the allocation of each participating investor i in the round, V is the true value of the offer, and Si is the private signal or assessment of each investor. The offer size is 30 shares and the maximum allocation per investor in each round is 10 shares. In the denominator, j stands for the three investors with the lowest Si, those that would benefit the most from the maximum allocation of 10 shares.
Panel B - Last 12 Rounds
	Dutch Auction	Book building	Competitive IPO
Mean	82.33%	43.51%	31.39%
Standard Deviation	12.73%	33.32%	32.26%
Maximum	99.51%	85.73%	98.04%
Minimum	43.47%	0.00%	0.00%

	t test (t statistic)	Wilcoxon test (v statistic)
Dutch Auction vs. Book building	6.53^** Note: “Book building” refers to a sealed bid, uniform price auction, and “competitive IPO” to a two-stage version of it. Significance at 10% and 5% denoted by * and **, respectively; BWE = [Σ(V-Si)×kqi] / [Σ(V-Sj)×10], where kqi is the allocation of each participating investor i in the round, V is the true value of the offer, and Si is the private signal or assessment of each investor. The offer size is 30 shares and the maximum allocation per investor in each round is 10 shares. In the denominator, j stands for the three investors with the lowest Si, those that would benefit the most from the maximum allocation of 10 shares.	4.64^** Note: “Book building” refers to a sealed bid, uniform price auction, and “competitive IPO” to a two-stage version of it. Significance at 10% and 5% denoted by * and **, respectively; BWE = [Σ(V-Si)×kqi] / [Σ(V-Sj)×10], where kqi is the allocation of each participating investor i in the round, V is the true value of the offer, and Si is the private signal or assessment of each investor. The offer size is 30 shares and the maximum allocation per investor in each round is 10 shares. In the denominator, j stands for the three investors with the lowest Si, those that would benefit the most from the maximum allocation of 10 shares.
Book building vs. Competitive IPO	1.57	1.87^* Note: “Book building” refers to a sealed bid, uniform price auction, and “competitive IPO” to a two-stage version of it. Significance at 10% and 5% denoted by * and **, respectively; BWE = [Σ(V-Si)×kqi] / [Σ(V-Sj)×10], where kqi is the allocation of each participating investor i in the round, V is the true value of the offer, and Si is the private signal or assessment of each investor. The offer size is 30 shares and the maximum allocation per investor in each round is 10 shares. In the denominator, j stands for the three investors with the lowest Si, those that would benefit the most from the maximum allocation of 10 shares.
Dutch Auction vs. Competitive IPO	8.81^** Note: “Book building” refers to a sealed bid, uniform price auction, and “competitive IPO” to a two-stage version of it. Significance at 10% and 5% denoted by * and **, respectively; BWE = [Σ(V-Si)×kqi] / [Σ(V-Sj)×10], where kqi is the allocation of each participating investor i in the round, V is the true value of the offer, and Si is the private signal or assessment of each investor. The offer size is 30 shares and the maximum allocation per investor in each round is 10 shares. In the denominator, j stands for the three investors with the lowest Si, those that would benefit the most from the maximum allocation of 10 shares.	4.81^** Note: “Book building” refers to a sealed bid, uniform price auction, and “competitive IPO” to a two-stage version of it. Significance at 10% and 5% denoted by * and **, respectively; BWE = [Σ(V-Si)×kqi] / [Σ(V-Sj)×10], where kqi is the allocation of each participating investor i in the round, V is the true value of the offer, and Si is the private signal or assessment of each investor. The offer size is 30 shares and the maximum allocation per investor in each round is 10 shares. In the denominator, j stands for the three investors with the lowest Si, those that would benefit the most from the maximum allocation of 10 shares.

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[TFN01t01] Note: “Book building” refers to a sealed bid, uniform price auction, and “competitive IPO” to a two-stage version of it. We tested if the performance of professionals and students was different for each pricing method and found no statistically significant results. Two sample t-tests (bank professionals and students) on Dutch auction, “book building” and “competitive IPO” returns reported the following t-statistics (p-values), respectively: 0.838 (0.41), 1.079 (0.28) and -0.546 (0.59).