The Journal of Financial Research • Vol. XXX, No. 1 • Pages 73–90 • Spring 2007 RULE CHANGES AND UNCERTAINTY IN DISCRIMINATORY AND UNIFORM PRICE AUCTIONS Jaclyn Beierlein East Carolina University Hideaki Kiyoshi Kato Nagoya University Abstract The auction literature indicates that uncertainty about the value of auctioned goods increases underpricing in discriminatory price auctions. Such uncertainty has a smaller effect on uniform price auctions because the pricing rule aggregates bidders’ information. We find that uncertainty resulting from inexperience with an auction mechanism has similar effects. Using initial public offering (IPO) data from Japan and Israel, we find that average underpricing increases temporarily in Japan’s discriminatory price auctions after changes in the auction rules, which suggests that bidders reduce their bids in response to uncertainty. Underpricing in Israel’s uniform price auctions is not affected by rule changes. JEL Classification: D44 I. Introduction Auctions are used in many markets to price and allocate divisible goods. The U.S. Treasury conducts weekly auctions of government debt securities; the International Monetary Fund auctions gold; and in France, Japan, Israel, Taiwan, and the United States, auction mechanisms have been used to sell initial public offerings (IPOs) of common stock. Although much theoretical and empirical work examines the effects of value uncertainty on auction outcomes, none addresses the effects of uncertainty We thank Daniel Greiner, Shmuel Kandel, Oded Sarig, Avi Wohl, and Takashi Kaneko for providing the IPO data; Charles Schnitzlein (the referee), William T. Moore (the former editor), Uri Loewenstein, Elizabeth Tashjian, Jaime Zender, Jim Wang, Michael Gordy, Keith Jakob, Orly Sade, Donald Vandergrift, Jim Winder, and session #137 attendees at the 2003 Financial Management Association annual meeting for constructive suggestions. We gratefully acknowledge financial support from the Marriner S. Eccles Fellowship, the University of Utah Graduate Research Fellowship, and the Japanese Ministry of Science and Education. This article was previously entitled “The Winner’s Curse and Changing the Rules of the Game.” 73