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Optimal IPO Design with Informed Trading

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Author Info

  • Sarah Parlane

    (University College of Dublin)

  • Fabrice Rousseau

    (NUI Maynooth)

Abstract

We characterize optimal IPO design in the presence of distinct ad- verse selection problems - one affecting the IPO stage and one arising in the after-market. Allocating shares to an investor with superior information in the after-market depresses the share's value to less informed investors. However, because it facilitates truthful interest report at the IPO stage it increases the expected offer price provided disadvantaged investors are sufficiently unlikely to flip their share. We compare the book-building's outcome to that of uniform price auction. The auction can enhance the expected offer price only if it systematically allocates a share to the strategic trader.

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File URL: http://www.ucd.ie/economics/research/papers/2007/WP07.06.pdf
File Function: First version, 2007
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Bibliographic Info

Paper provided by School Of Economics, University College Dublin in its series Working Papers with number 200706.

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Length: 37 pages
Date of creation: 09 May 2007
Date of revision:
Handle: RePEc:ucn:wpaper:200706

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Related research

Keywords: Initial Public Offering; Book-building; Auction; Informed Trading; Secondary Market and Dealer Market;

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References

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  1. Jenkinson, Tim & Ljungqvist, Alexander, 2001. "Going Public: The Theory and Evidence on How Companies Raise Equity Finance," OUP Catalogue, Oxford University Press, edition 2, number 9780198295990, October.
  2. Andrew Ellul & Marco Pagano, 2003. "IPO underpricing and after-market liquidity," CSEF Working Papers 99, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 09 Feb 2006.
  3. Glosten, Lawrence R. & Milgrom, Paul R., 1985. "Bid, ask and transaction prices in a specialist market with heterogeneously informed traders," Journal of Financial Economics, Elsevier, vol. 14(1), pages 71-100, March.
  4. Philippe Jehiel & Benny Moldovanu, 2000. "Auctions with Downstream Interaction Among Buyers," RAND Journal of Economics, The RAND Corporation, vol. 31(4), pages 768-791, Winter.
  5. 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.
  6. Laurie Krigman & Wayne H. Shaw & Kent L. Womack, 1999. "The Persistence of IPO Mispricing and the Predictive Power of Flipping," Journal of Finance, American Finance Association, vol. 54(3), pages 1015-1044, 06.
  7. Cho, In-Koo & Kreps, David M, 1987. "Signaling Games and Stable Equilibria," The Quarterly Journal of Economics, MIT Press, vol. 102(2), pages 179-221, May.
  8. Jehiel, Philippe & Benny Moldovanu, 1994. "Strategic Non-Participation," Discussion Paper Serie B 287, University of Bonn, Germany.
  9. Fishe, Raymond P. H., 2002. "How Stock Flippers Affect IPO Pricing and Stabilization," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 37(02), pages 319-340, June.
  10. Aggarwal, Reena, 2003. "Allocation of initial public offerings and flipping activity," Journal of Financial Economics, Elsevier, vol. 68(1), pages 111-135, April.
  11. ehiel, Philippe & Benny Moldovanu & Ennio Stacchetti, 1994. "How (not) to sell nuclear weapons," Discussion Paper Serie B 288, University of Bonn, Germany.
  12. Boehmer, Beatrice & Boehmer, Ekkehart & Fishe, Raymond P. H., 2006. "Do Institutions Receive Favorable Allocations in IPOs with Better Long-Run Returns?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 41(04), pages 809-828, December.
  13. Benveniste, Lawrence M. & Spindt, Paul A., 1989. "How investment bankers determine the offer price and allocation of new issues," Journal of Financial Economics, Elsevier, vol. 24(2), pages 343-361.
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