Pricing of Initial Equity Issues: The French Sealed-Bid Auction

Abstract

In France all initial issues of common stock since 1964 have been priced and allocated in a sealed-bid auction procedure, which represents a prominent alternative to the underwriting systems used in other major financial markets. The French market has ranked third behind the United States and Japan in total volume of equity issues in recent years.' The purpose of this study is to describe the French auction system for unseasoned equity issues and to analyze the postoffering price adjustment process for new issues in the period 1968-71. The evidence is consistent with the efficient market hypothesis, which would lead one to expect rapid adjustment of prices in the first day of trading to reflect all relevant information. The French auction procedure has been successful in producing mean offering prices very near competitive equilibrium prices, as reflected by market prices in trading subsequent to the offering. Two desirable results have been to return to the existing stockholders of the selling companies proceeds in an amount averaging 3 percent below the price reported in early trading, indicating small initial premiums and low issue costs; and to afford an equal opportunity to all investors who desire to bid on new stock issues.2