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Security Design in Initial Public Offerings

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  • Archishman Chakraborty
  • Simon Gervais
  • Bilge Yilmaz

Abstract

We investigate an IPO security design problem when information asymmetries across investors lead to a winner's curse. Firms that are riskier in down markets can lower the cost of going public by using unit IPOs, in which equity and warrants are combined into a non-divisible package. Furthermore, firms that have a sizeable growth potential even in bad states of the world can fully eliminate the winner's curse problem by making the warrants callable. Our theory is consistent with the prominent use of unit IPOs and produces empirical implications that differentiate it from existing theories. Copyright 2010, Oxford University Press.

Suggested Citation

  • Archishman Chakraborty & Simon Gervais & Bilge Yilmaz, 2010. "Security Design in Initial Public Offerings," Review of Finance, European Finance Association, vol. 15(2), pages 327-357.
  • Handle: RePEc:oup:revfin:v:15:y:2010:i:2:p:327-357
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    File URL: http://hdl.handle.net/10.1093/rof/rfp029
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    Cited by:

    1. Lakicevic, Milan & Shachmurove, Yochanan & Vulanovic, Milos, 2014. "Institutional changes of Specified Purpose Acquisition Companies (SPACs)," The North American Journal of Economics and Finance, Elsevier, vol. 28(C), pages 149-169.
    2. Cerezo Sánchez, David, 2017. "An Optimal ICO Mechanism," MPRA Paper 81285, University Library of Munich, Germany.

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