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IPOs with Buy- and Sell-Side Information Production: The Dark Side of Open Sales

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  • Chris Yung

Abstract

The proposed model, by incorporating both (1) banker screening of new issues and (2) costly evaluation by investors, is the first to admit endogenous double-sided information production. It demonstrates a nontrivial link between these two sides: the banker wishes to structure a sale conducive to investor research because selling to an uninformed pool would result in his own shirking. One application of this paradigm indicates that, contrary to the findings of most IPO models, larger investor pools are not always better. This result resolves the "participation restriction puzzle" of why bankers do not open sales to all bidders even when doing so would maximize competition and reduce underpricing. Copyright 2005, Oxford University Press.

Suggested Citation

  • Chris Yung, 2005. "IPOs with Buy- and Sell-Side Information Production: The Dark Side of Open Sales," The Review of Financial Studies, Society for Financial Studies, vol. 18(1), pages 327-347.
    • Handle: RePEc:oup:rfinst:v:18:y:2005:i:1:p:327-347
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    File URL: http://hdl.handle.net/10.1093/rfs/hhi004
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    Citations

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    Cited by:

    1. Kenji Kutsuna & Janet Kiholm Smith & Richard L. Smith, 2009. "Public Information, IPO Price Formation, and Long‐Run Returns: Japanese Evidence," Journal of Finance, American Finance Association, vol. 64(1), pages 505-546, February.
    2. Ravi Jagannathan & Ann E. Sherman, 2006. "Why Do IPO Auctions Fail?," NBER Working Papers 12151, National Bureau of Economic Research, Inc.
    3. Bernardo Bortolotti & William Megginson & Scott B. Smart, 2008. "The Rise of Accelerated Seasoned Equity Underwritings," Journal of Applied Corporate Finance, Morgan Stanley, vol. 20(3), pages 35-57, June.
    4. Jagannathan, Ravi & Jirnyi, Andrei & Sherman, Ann Guenther, 2015. "Share auctions of initial public offerings: Global evidence," Journal of Financial Intermediation, Elsevier, vol. 24(3), pages 283-311.
    5. Sherman, Ann E., 2005. "Global trends in IPO methods: Book building versus auctions with endogenous entry," Journal of Financial Economics, Elsevier, vol. 78(3), pages 615-649, December.
    6. Zhang, Feng, 2012. "Information precision and IPO pricing," Journal of Corporate Finance, Elsevier, vol. 18(2), pages 331-348.
    7. Huang, Hsin-Yi & Chiang, Min-Hsien & Lin, Jia-Hui & Lin, Yun, 2017. "Fixed-price, auction, and bookbuilding IPOs: Empirical evidence in Taiwan," Finance Research Letters, Elsevier, vol. 22(C), pages 11-19.
    8. Wang, Wei & Yung, Chris, 2021. "IPO quantity revisions," Journal of Banking & Finance, Elsevier, vol. 132(C).
    9. Liu, Laura Xiaolei & Lu, Ruichang & Sherman, Ann E. & Zhang, Yong, 2023. "IPO underpricing and limited attention: Theory and evidence," Journal of Banking & Finance, Elsevier, vol. 154(C).

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