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Review of Finance Advance Access originally published online on April 21, 2008
Review of Finance 2008 12(4):673-700; doi:10.1093/rof/rfn006
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© The Author 2008. Published by Oxford University Press on behalf of the European Finance Association. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org

The Optimality of Uniform Pricing in IPOs: An Optimal Auction Approach*

Moez Bennouri1 and Sonia Falconieri2

1 HEC Montréal
2 Brunel University

This paper uses an optimal auction approach to investigate the conditions under which uniform pricing in IPOs is optimal. We show that the optimality of a uniform price in IPOs depends crucially on whether the (optimal) allocation rule is restricted. These restrictions may stem from the retail investors' budget constraint and/or from the institutional investors' preferences. We show that the main determinant of the optimality of a uniform pricing rule is the existence and the shape of the retail investors' budget constraint. In contrast, institutional investors' preferences are shown to mainly affect the optimal allocation rule.

JEL Classification: D8, G2

* We are very grateful to the editor Marco Pagano and two anonymous referees for their insightful comments. We also thank Robert Clark, François Derrien, Paolo Fulghieri, David Martimort and Jean Charles Rochet for helpful comments. We gratefully acknowledge financial support from the Direction de Recherche of HEC Montréal and the Initiative of the New Economy (INE) program of SSHRC (Canada).


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