Linkedin’s IPO followed the familiar pattern.  Priced to initial investors at $45/share, the stock soared to a peak of $120/share on the first day of trading and closed at around $90.  “Money was left on the table.” Felix Salmon has a good summary of different opinions about this and he briefly discusses auctions as an alternative to the traditional door-to-door IPO.  You will recall that Google used an auction when it went public.

Like Mr. Salmon you might think that the winner’s curse would prevent an auction from discovering the right price and ensuring that money is not left on the table.  The price-discovery properties of an auction rely on partially informed investors bidding according to their private information and this information thereby being reflected in the price.  But a (potentially) winning bidder foresees that his win would mean that most other bidders bid less than he and that therefore “the market” is more pessmistic about the value of the firm than he is.  Anticipating this, he underbids.  Since all informed investors do this, the auction price will understate the value of the firm.  Money will be left on the table again.

But an IPO is a multi-unit auction.  Many shares are up for sale.  A new strategic feature arises in these auctions, the loser’s curse.  If you are outbid, then you know that many informed investors were more optimistic than you and this will make you regret having bid too low.  This strategic force pushes you to raise your bid.

And in fact, as shown by Pesendorfer and Swinkels, for large auctions, under some quite general conditions, a uniform-price sealed bid auction produces a sales price which comes very close to the market’s best estimate of the value of the firm.  No money is left on the table.

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