Bayesian Bid Updating in Experimental IPO Pricing Methods

Abstract

This article investigates bid updating and subject learning in experimental initial public offers (IPO) of stock pricing methods. A clock auction stands for the Dutch auction. A sealed-bid uniform price auction represents book building. A two-stage book building emulation represents a recent innovation called competitive IPO. The literature addresses investor learning in a single method from actual bidding data in Taiwan. Investor IPO bidding is commonly private information and one needs to employ experiments to analyze investor behavior. Rational or Bayesian updating takes place when investor performance improves in successive bids. Naive reinforcement or updating means that subjects bid influenced by their success in previous biddings, with little consideration of the information available. The experimental book building led to gains more often. The evidence in the updating analysis suggests that learning occurs according to Bayesian updating and not to naive updating in “book building” and is consistent with it being the most common IPO method around the world.