Why Don't Ipo Firms Disclose a Reservation Price?

Abstract

A significant proportion of IPOs filed with the SEC are withdrawn during bookbuilding when it becomes clear to the issuer that they will not achieve a minimum acceptable offer price. Why don’t issuers disclose this price at the outset? This question is important given that in many auction designs, including some for IPOs in other countries, a reservation price is formally posted, and the auction literature has shown that posting a reservation price can be optimal. We characterize the firms that would enjoy higher proceeds if their reservation price were disclosed and the firms that are better off with non-disclosure. We also identify a set of issuers that benefit most with ‘partial disclosure’ - the reduction in, but not elimination of, investor uncertainty surrounding a secret reserve price - a strategy that to our knowledge has not previously been admitted in the auction literature. We explain why the firms that would benefit from the disclosure of a reserve price are those least likely to file for an IPO in the first place, explaining why firms that do file are not observed to post a reservation price. Our results have implications for issuing firms and for regulators of primary equity markets where bookbuilding or economically equivalent auction mechanisms are used.