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Optimal Initial Public O¤ering design with aftermarket trading

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  • Fabrice Rousseau

    (Economics, National University of Ireland, Maynooth)

  • Sarah Parlane

    (University College Dublin)

Abstract

We characterize the optimal pricing and allocation of shares in the presence of distinct adverse selection problems. Some investors have private information at the time of the IPO and sell their shares in the after-market upon facing liquidity needs. Others learn their private interest in the after-market, and sell their shares strategically. The optimal mechanism trades-o¤ informational rents and rents to strategic traders. Flipping facilitates truthful information revelation. When liquidity needs are likely, it is optimal to allocate all shares to investors informed at the IPO stage. Otherwise, some shares are allocated to those who trade strategically in the after-market.

Suggested Citation

  • Fabrice Rousseau & Sarah Parlane, 2009. "Optimal Initial Public O¤ering design with aftermarket trading," Economics Department Working Paper Series n2041109.pdf, Department of Economics, National University of Ireland - Maynooth.
    • Handle: RePEc:may:mayecw:n2041109.pdf
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    References listed on IDEAS

    as
    1. Andrew Ellul & Marco Pagano, 2006. "IPO Underpricing and After-Market Liquidity," Review of Financial Studies, Society for Financial Studies, vol. 19(2), pages 381-421.
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    3. Biais, Bruno & Faugeron-Crouzet, Anne Marie, 2002. "IPO Auctions: English, Dutch, ... French, and Internet," Journal of Financial Intermediation, Elsevier, vol. 11(1), pages 9-36, January.
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    5. Hirshleifer, David & Teoh, Siew Hong, 2003. "Limited attention, information disclosure, and financial reporting," Journal of Accounting and Economics, Elsevier, vol. 36(1-3), pages 337-386, December.
    6. Sherman, Ann E, 2000. "IPOs and Long-Term Relationships: An Advantage of Book Building," Review of Financial Studies, Society for Financial Studies, vol. 13(3), pages 697-714.
    7. Moez Bennouri & Sonia Falconieri, 2006. "Optimal auctions with asymmetrically informed bidders," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 28(3), pages 585-602, August.
    8. Ellis, Katrina, 2006. "Who trades IPOs? A close look at the first days of trading," Journal of Financial Economics, Elsevier, vol. 79(2), pages 339-363, February.
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