1. 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. 2 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. IPO

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

4. 4  Tacit collusion equilibrium: Collusive strategies lead to a low market price Wilson (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 Previous Theory

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

6. 6 Characterization of Equilibria  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 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 v 0

7. 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. 8 Experimental Design

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

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

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

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

13. 13 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 Conclusions

14. 14 Thank you !