How is the issue price set? Strategic interactions between issuers and brokers in an IPO

PurposeThe study aims to understand how Initial Public Offerings (IPO) issue prices are formed through strategic interactions between issuers and brokers. It challenges the conventional assumption of persistent information asymmetry and reinterprets underpricing in light of endogenous information exchange. The goal is toidentify when and why agents may choose to share private information and how these decisions affect the equilibrium issue price.Design/methodology/approachThis study develops a formal game-theoretic model capturing strategic information exchange between issuers and brokers during IPO price setting. Unlike prior models assuming static information asymmetry, it endogenizes the pricing process through agent interaction. The model considers private beliefs, subjective probability assessments and incentives to share, distort or withhold information. The framework accommodates both principal–agent and symmetric bargaining settings and isolates market-related from effort-related private information, offering new insights into the dynamics of negotiation.FindingsThe model shows that both issuers and brokers have strong incentives to share private market-related information, leading to full information revelation and alignment on a common optimal issue price. Contrary to traditional intuition, brokers may prefer higher issue prices, whereas issuers may favor lower ones. This result contradicts assumptions underlying standard underpricing theories and suggests that information asymmetry between issuer and broker may dissipate through strategic interaction.Research limitations/implicationsThe model abstracts from multi-offer dynamics, side payments and oligopolistic brokerage structures, focusing instead on a stylized one-time bilateral negotiation. Further empirical validation is needed, but the framework lays the groundwork for new theoretical and experimental studies on IPO pricing and underpricing mechanisms.Practical implicationsUnderstanding the strategic motives behind information exchange in IPO pricing can help issuers and brokers improve negotiation outcomes. The findings suggest that fostering trust and transparent communication may lead to better pricing decisions and reduce inefficiencies due to misaligned incentives or distrust-driven behavior.Social implicationsReducing information asymmetry through voluntary sharing in capital markets can enhance transparency, fairness and market efficiency. By showing that private actors may align without regulatory intervention, the study provides a theoretical case for trust-based practices in financial intermediation.Originality/valueTo the best of the authors’ knowledge, this paper is the first to model IPO price-setting as a bilateral game of information exchange, revealing that issuer–broker asymmetry is not structurally inevitable. The study reinterprets IPO underpricing as an outcome of dynamic strategic alignment rather than static conflicts of interest, providing a novel lens for academic and practitioner understanding.