Editing Initial public offering (section)

===Pricing===

A company planning an IPO typically appoints a lead manager, known as a [[bookrunner]], to help it arrive at an appropriate price at which the shares should be offered. There are two primary ways in which the price of an IPO can be determined. Either the company, with the help of its lead managers, fixes a price ("fixed price method"), or the price can be determined through analysis of confidential investor demand data compiled by the bookrunner ("[[book building]]").

Historically, many IPOs have been underpriced. The effect of underpricing an IPO is to generate additional interest in the stock and a rapid rise in share price when it first becomes publicly traded (known as an "IPO pop"). [[Flipping]], or quickly selling shares for a [[Profit (accounting)|profit]], can lead to significant gains for investors who were allocated shares of the IPO at the offering price. However, underpricing an IPO results in lost potential capital for the issuer. One extreme example is [[theglobe.com]] IPO which helped fuel the IPO "mania" of the late 1990s internet era. Underwritten by [[Bear Stearns]] on 13 November 1998, the IPO was priced at $9 per share. The share price quickly increased 1,000% on the opening day of trading, to a high of $97. Selling pressure from institutional flipping eventually drove the stock back down, and it closed the day at $63. Although the company did raise about $30&nbsp; million from the offering, it is estimated that with the level of demand for the offering and the volume of trading that took place they might have left upwards of $200&nbsp;million on the table.

The danger of overpricing is also an important consideration. If a stock is offered to the public at a higher price than the market will pay, the underwriters may have trouble meeting their commitments to sell shares. Even if they sell all of the issued shares, the stock may fall in value on the first day of trading. If so, the stock may lose its marketability and hence even more of its value. This could result in losses for investors, many of whom being the most favored clients of the underwriters. Perhaps the best-known example of this is the Facebook IPO in 2012.

Underwriters, therefore, take many factors into consideration when pricing an IPO, and attempt to reach an offering price that is low enough to stimulate interest in the stock but high enough to raise an adequate amount of capital for the company. When pricing an IPO, underwriters use a variety of key performance indicators and non-GAAP measures.<ref>{{cite journal|last1=Gould|first1=Michael|title=How Non-GAAP Measures Can Impact Your IPO|url=https://www.transactionadvisors.com/insights/how-non-gaap-measures-can-impact-your-ipo|journal=Transaction Advisors|issn=2329-9134|access-date=16 January 2015|archive-date=6 November 2018|archive-url=https://web.archive.org/web/20181106192726/https://www.transactionadvisors.com/insights/how-non-gaap-measures-can-impact-your-ipo|url-status=dead}}</ref> The process of determining an optimal price usually involves the [[underwriters]] ("syndicate") arranging share purchase commitments from leading institutional investors.

Some researchers (Friesen & Swift, 2009) believe that the underpricing of IPOs is less a deliberate act on the part of issuers and/or underwriters, and more the result of an over-reaction on the part of investors (Friesen & Swift, 2009). One potential method for determining to underprice is through the use of [[IPO underpricing algorithm]]s. Other researchers have discovered that firms with higher revenues from licensing-based technology commercialization exhibit greater IPO underpricing, while a firm's stock of patents mitigates this effect.<ref>{{Cite journal|last1=Morricone |first1=Serena |last2=Munari |first2=Federico |last3=Oriani |first3=Raffaele |last4=de Rassenfosse|first4=Gaétan|title=Commercialization Strategy and IPO Underpricing|date=2017|url=http://cdm-it.epfl.ch/RePEc/iip-wpaper/commercialization_strategy_and_IPO_underpricing.pdf|journal=Research Policy|volume=46|issue=6|pages=1133–1141|doi=10.2139/ssrn.2966036 |s2cid=157454297 |author-link4=Gaétan de Rassenfosse}}</ref>

====Dutch auction====
A [[Dutch auction]] allows shares of an initial public offering to be allocated based only on price aggressiveness, with all successful bidders paying the same price per share.<ref>{{cite web |last=Demos |first=Telis |date=21 June 2012  |url=https://blogs.wsj.com/deals/2012/06/21/exactly-what-is-a-dutch-auction/ |title=What Is a Dutch Auction? |work=The Wall Street Journal |access-date=16 October 2012 |url-access=subscription}}</ref><ref>{{cite web |url=http://www.slate.com/articles/news_and_politics/explainer/1999/05/what_is_a_dutch_auction_ipo.html |title=What Is a Dutch Auction IPO? |date=6 May 1999 |work=Slate Magazine |access-date=16 October 2012 }}</ref> One version of the Dutch auction is [[OpenIPO]], which is based on an auction system designed by economist [[William Vickrey]]. This auction method ranks bids from highest to lowest, then accepts the highest bids that allow all shares to be sold, with all winning bidders paying the same price. It is similar to the model used to auction [[United States Treasury security#Treasury bill|Treasury bills]], notes, and bonds since the 1990s. Before this, Treasury bills were auctioned through a discriminatory or pay-what-you-bid auction, in which the various winning bidders each paid the price (or yield) they bid, and thus the various winning bidders did not all pay the same price. Both discriminatory and uniform price or "Dutch" auctions have been used for IPOs in many countries, although only [[uniform price auction]]s have been used so far in the US. Large IPO auctions include Japan Tobacco, Singapore Telecom, BAA Plc and Google (ordered by size of proceeds).

A variation of the Dutch auction has been used to take a number of U.S. companies public including [[Morningstar, Inc.|Morningstar]], [[Interactive Brokers Group]], [[Overstock.com]], Ravenswood Winery, Clean Energy Fuels, and [[Boston Beer Company]].<ref>{{cite news|url=https://www.nytimes.com/2012/02/19/your-money/an-ipo-process-that-is-customer-friendly.html?pagewanted=all&_r=0 | work=The New York Times | first=Jeff | last=Sommer | title=No Bitter Aftertaste From This Stock Offering | date=18 February 2012 |url-access=limited}}</ref> In 2004, Google used the Dutch auction system for its initial public offering.<ref>{{cite web|url=http://www.law.umaryland.edu/academics/journals/jbtl/issues/3_1/3_1_041_Hild.pdf|title=Journal of Business & Technology Law – Academic Journals – University of Maryland Francis King Carey School of Law|access-date=27 November 2016|url-status=dead|archive-date=27 October 2011|archive-url=https://web.archive.org/web/20111027131306/http://www.law.umaryland.edu/academics/journals/jbtl/issues/3_1/3_1_041_Hild.pdf}}</ref> Traditional U.S. investment banks have shown resistance to the idea of using an auction process to engage in public securities offerings. The auction method allows for equal access to the allocation of shares and eliminates the favorable treatment accorded important clients by the underwriters in conventional IPOs. In the face of this resistance, the Dutch auction is still a little used method in U.S. public offerings, although there have been hundreds of auction IPOs in other countries.

In determining the success or failure of a Dutch auction, one must consider competing objectives.<ref>{{cite web |last=Hensel |first=Nayantara |date=4 November 2005 |url=http://hbswk.hbs.edu/archive/4747.html |title=Are Dutch Auctions Right for Your IPO? |publisher=Harvard Business School |work=Working Knowledge |access-date=16 October 2012}}</ref><ref>{{cite web |url=http://law.bepress.com/cgi/viewcontent.cgi?article=3706&context=expresso |title=Is The Dutch Auction IPO A Good Idea? |publisher=Queen's University |last=Anand |first=Anita Indira |series=Queen's University Law and Economics Workshop |access-date=21 July 2021}}</ref> If the objective is to reduce risk, a traditional IPO may be more effective because the underwriter manages the process, rather than leaving the outcome in part to random chance in terms of who chooses to bid or what strategy each bidder chooses to follow. From the viewpoint of the investor, the Dutch auction allows everyone equal access. Moreover, some forms of the Dutch auction allow the underwriter to be more active in coordinating bids and even communicating general auction trends to some bidders during the bidding period. Some have also argued that a uniform price auction is more effective at [[price discovery]], although the theory behind this is based on the assumption of independent private values (that the value of IPO shares to each bidder is entirely independent of their value to others, even though the shares will shortly be traded on the aftermarket). Theory that incorporates assumptions more appropriate to IPOs does not find that sealed bid auctions are an effective form of price discovery, although possibly some modified form of auction might give a better result.

In addition to the extensive international evidence that auctions have not been popular for IPOs, there is no U.S. evidence to indicate that the Dutch auction fares any better than the traditional IPO in an unwelcoming market environment. A Dutch auction IPO by WhiteGlove Health, Inc., announced in May 2011 was postponed in September of that year, after several failed attempts to price. An article in ''[[the Wall Street Journal]]'' cited the reasons as "broader stock-market [[volatility (finance)|volatility]] and uncertainty about the global economy have made investors wary of investing in new stocks".<ref>{{cite web |url=http://www.statesman.com/news/business/whiteglove-seeks-to-raise-325-million-in-dutch-auc/nRZg9/ |title=WhiteGlove seeks to raise $32.5 million in 'Dutch auction' IPO |work=Statesman |access-date=16 October 2012 |url-status=dead |archive-date=4 November 2013 |archive-url=https://web.archive.org/web/20131104211516/http://www.statesman.com/news/business/whiteglove-seeks-to-raise-325-million-in-dutch-auc/nRZg9/ }}</ref><ref>{{cite web |last=Cowan |first=Lynn |date=21 September 2011 |url=https://www.wsj.com/articles/SB10001424053111903791504576584711472079724 |title=WhiteGlove Health Shelves IPO Indefinitely |work=The Wall Street Journal |access-date=16 October 2012 |url-access=subscription}}</ref>