Signalling in the Internet Craze of Initial Public Offerings
AbstractIn this paper we analyze the clustering phenomenon of underpricing in initial public offerings (IPOs), where firms in a particular industry choose to issue their new shares at the same time and at great discounts. The industry consists of many firms that have private in-formation about their own qualities (high or low) and that must raise external capital first before production. In the product market, firms compete through quality ladders, where each high-quality firm monopolizes the production of a particular variety of product. We show that self-fulfilling multiple equilibria arise. In one, no firm underprices the IPO. In the other, all high-quality firms underprice their IPOs, resulting in clustering. Moreover, the clustering is more likely to occur in economic upturns than in downturns, and in an easy credit market than in a tight market.
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Bibliographic InfoPaper provided by University of Toronto, Department of Economics in its series Working Papers with number shouyong-02-03.
Length: 44 pages
Date of creation: 11 Jul 2002
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Initial public offerings; Signalling; Clustering; Multiple equilibria.;
Other versions of this item:
- Cao, Melanie & Shi, Shouyong, 2006. "Signaling in the Internet craze of initial public offerings," Journal of Corporate Finance, Elsevier, vol. 12(4), pages 818-833, September.
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
This paper has been announced in the following NEP Reports:
- NEP-DGE-2002-09-21 (Dynamic General Equilibrium)
- NEP-ENT-2002-08-29 (Entrepreneurship)
- NEP-RMG-2002-09-21 (Risk Management)
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