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Ping Zhang 30.06.2007 Rome, ESA 2007 International Meeting

A Complete Characterization of Pure Strategy Equilibria in Uniform Price IPO Auctions: Experimental Evidence. Ping Zhang 30.06.2007 Rome, ESA 2007 International Meeting. IPO. Initial Public Offerings Firms raise money from a primary stock market by selling new stocks.

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Ping Zhang 30.06.2007 Rome, ESA 2007 International Meeting

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  1. A Complete Characterization of Pure Strategy Equilibria in Uniform Price IPO Auctions: Experimental Evidence Ping Zhang 30.06.2007 Rome, ESA 2007 International Meeting

  2. IPO Initial Public Offerings Firms raise money from a primary stock market by selling new stocks. These new shares for sale to the public are known as Initial Public Offerings.

  3. Uniform Price Auction Investors submit demand schedules p p* all bidders Investors obtain quantities demanded at p* at a price of p* bidder i S

  4. Previous Theory • Tacit collusion equilibrium: Collusive strategies lead to a low market priceWilson (1979), Back and Zender (1993), Biais and Faugeron (2002), Ausubel and Cramton (2002) • A collusive equilibrium only exists in continuous demand functions; does not survive with finite number of bids Harbord, Fabra and von der Fehr (2002)Kremer and Nyborg (2004) • Advantage of increased competition Friedman, 1961, 1990

  5. Model By Biais and Faugeron (2002) N informed investors Signals: High, 1- Low S shares uninformed investors No signalcan buy up to S(1-k), k∈[0,1] The market value vn increases with the number of high signals n; risk neutral.

  6. Characterization of Equilibria Different type investors can be involved in the set of equilibria: EH, EHL, EHU, EHLU. EH : H investors absorb all the shares, U and L investors only bid between 0 and v0 • Bidders bid more aggressively when having higher expected value; price increases with value • Price can be any between 0 and the realized market value • The tacit collusion is only an extreme case of the set of equilibria

  7. Experimental Design • 100,000 shares to be sold to 4 investors • 3 informed investors: observe High signal or Low signal with equal chance • 1 uninformed investor: no signal • Market value = 1 + # of HIGH signals • 14 groups • 20 rounds per session; average earnings: 16.92 pounds (1.18- 45.34)

  8. Experimental Design

  9. Results Result 1: In the Uniform Price Auction H bidders bid more aggressively than L and U bidders

  10. Results Result 2: In the uniform price auction H investors receive higher allocations on average.

  11. Results Result 3: In the uniform price auction the market price increases with the market value.

  12. Results In TCE : bids are independent of signals allocations are independent of signalsmarket price is independent of market value Results 1-3 are inconsistent with Tacit Collusion Equilibria.

  13. Conclusions • Behaviour in uniform price auctions not consistent with Tacit Collusion equilibrium • In the uniform price auction, bidders with higher expected market value bid more aggressively, price increases with value • Behaviour in the experiment support the properties of the new set of equilibria • The TCE of the uniform price auction should not be over emphasized in revenue comparison among IPO mechanisms

  14. Thank you !

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