Title

“Different types of IPO mechanism: book building vs. auction vs. fixed price”

Author

The article that this research paper will used as a base article will be Why Don’t Issuers Choose IPO Auctions? The Complexity of Indirect Mechanisms. By Ravi Jagannathana, Andrei Jirnyiaa and Ann Shermanc.

Keywords

Initial Public Offerings

This is the first time a company decides to sells its shares to the public. Initial public offerings are mostly done my small sizes firms who wants to raise capital for their expansion. Large companies also go for initial public companies when they want to switch from being the private limited companies to public limited companies.

Auctions

Auction is an exchange process in which good or services are sell by the seller to the buyer with the highest bid.

Book building

The act of acquiring prospective traders for the objective of buying new shares that are first time issued. The level of the sign of attention can have an effect on the cost of the new shares because it allows getting a concept of how much requirement there is for these new shares.

Mechanism designs

It is a macroeconomic theory that explains that how organizations can obtain their social and economic goals provided that the customers might have incomplete information and have their own self interests.

Abstract

This paper would compare the three methods used in the IPO mechanism over the last fifty years. The three methods used are auctions, fixed service public offers and book building. Among the three the least widely used among people is an auction. Because the complete auction process is quite complicated and difficult for the users. There is very less research on Initial public offering in the literature even though initial public offering is very important because as leads to price discovery which further helps in reducing the conflicts between the buyers and the sellers. But there are no single factors that influence the choice of which mechanism to be used. The paper will review all the factors that can possibility influence the choice of the issuers and investors internationally.

Morever,this paper will suggests that one of the main reason that auctions is one of the less preferable methods by the investors is because they don’t like the whole procedure of participating in the auctions. Furthermore, it will suggest that the issuers should move to hybrid mechanism, similar to one followed by the U.S treasury department.

Introduction.

Whenever a firm issues its shares in the market for the first time which is that the firm is going for the initial public offering, and then the firm has to go through a whole process of deciding the right price for its shares, the potential buyers and the number of shares to be issued. Moving on to the options that a firms has for initial public offering are, fixed price offerings, book building, different types of hybrid and auctions.

If we talk about U.S, then in U.S book building is widely used for initial public offering. Book building is the act of acquiring prospective traders for the objective of buying new shares that are first time issued. The level of the sign of attention can have an effect on the cost of the new shares because it allows getting a concept of how much requirement there is for these new shares. However, with this option there are always the chances of abuse and prove that internet is always full of scandal of abuse during the book building.