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A theory of the transition to secondary market trading of IPOs

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  • Chen, Zhaohui
  • Wilhelm Jr., William J.

Abstract

We develop a model in which investment banks and institutional investors collaborate in smoothing an initial public offering's (IPOs) transition to secondary market trading. Their intervention promotes welfare under the assumption that significant new information arrives in the market in the immediate aftermath of the IPO. Under this assumption, it is optimal to stage the offering and suboptimal to commit to selling shares at a uniform price. The optimal strategy yields an economic rationale for secondary market price stabilization for IPOs carried out via a well-coordinated network of repeat institutional investors.

Suggested Citation

  • Chen, Zhaohui & Wilhelm Jr., William J., 2008. "A theory of the transition to secondary market trading of IPOs," Journal of Financial Economics, Elsevier, vol. 90(3), pages 219-236, December.
  • Handle: RePEc:eee:jfinec:v:90:y:2008:i:3:p:219-236
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Jones, Steven L. & Yeoman, John C., 2014. "Initial uncertainty and the risk of setting a fixed-offer price: Implications for the pricing of bookbuilt and best-efforts IPOs," Journal of Corporate Finance, Elsevier, vol. 27(C), pages 194-215.
    2. repec:eee:jfinin:v:32:y:2017:i:c:p:60-75 is not listed on IDEAS
    3. Adriani, Fabrizio & Deidda, Luca & Sonderegger, Silvia, 2009. "The Role of Financial Intermediaries in Securities Issues: A Theoretical Analysis," MPRA Paper 16112, University Library of Munich, Germany.
    4. Neupane, Suman & Thapa, Chandra, 2013. "Underwriter reputation and the underwriter–investor relationship in IPO markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 24(C), pages 105-126.
    5. repec:kap:jmgtgv:v:22:y:2018:i:2:d:10.1007_s10997-017-9389-1 is not listed on IDEAS
    6. Bradley, Daniel J. & Gonas, John S. & Highfield, Michael J. & Roskelley, Kenneth D., 2009. "An examination of IPO secondary market returns," Journal of Corporate Finance, Elsevier, vol. 15(3), pages 316-330, June.
    7. Arnab Bhattacharya & Binay Bhushan Chakrabarti, 2014. "An Examination of Adverse Selection Risk in Indian IPO After-Markets using High Frequency Data," International Journal of Economic Sciences, University of Economics, Prague, vol. 2014(3), pages 01-49.
    8. Mouri, Nacef & Sarkar, M.B. & Frye, Melissa, 2012. "Alliance portfolios and shareholder value in post-IPO firms: The moderating roles of portfolio structure and firm-level uncertainty," Journal of Business Venturing, Elsevier, vol. 27(3), pages 355-371.
    9. Jiang, Li & Li, Gao, 2013. "Investor sentiment and IPO pricing during pre-market and aftermarket periods: Evidence from Hong Kong," Pacific-Basin Finance Journal, Elsevier, vol. 23(C), pages 65-82.
    10. repec:eee:finana:v:51:y:2017:i:c:p:25-53 is not listed on IDEAS
    11. Fabrice Rousseau & Sarah Parlane, 2009. "Optimal Initial Public O¤ering design with aftermarket trading," Economics, Finance and Accounting Department Working Paper Series n2041109.pdf, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth.
    12. Fabrizio Adriani & Luca G. Deidda & Silvia Sonderegger, 2014. "How do Financial Intermediaries Create Value in Security Issues?," Review of Finance, European Finance Association, vol. 18(5), pages 1915-1951.
    13. Md Hamid Uddin & Mahendra Raj, 2012. "Aftermarket Risk And Underpricing Of Initial Public Offers In The Arabian Gulf Countries: An Empirical Analysis," The International Journal of Business and Finance Research, The Institute for Business and Finance Research, vol. 6(3), pages 123-138.
    14. Seshadev Sahoo, 2015. "Subscription Rate and Volatility," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 14(1), pages 20-58, April.

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