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Strategic pricing of equity issues

Author

Listed:
  • Klaus Ritzberger

    () (Institute for Advanced Studies, Department of Economics and Finance, Stumpergasse 56, 1060 Vienna, AUSTRIA)

  • Frank Milne

    () (Queen's University, Department of Economics, Kingston Ontario K7L 3N6, CANADA)

Abstract

Consider a general equilibrium model where agents may behave strategically. Specifically, suppose some firm issues new shares. If the primary market price is controlled by the issuing institution and investors' expectations on future equity prices are constant in their share purchases, the share price on the primary market cannot exceed the secondary market share price. In certain cases this may imply strict underpricing of newly issued shares. If investors perceive an influence on future share prices overpriced issues may occur in equilibrium. This provides an example of strategic price manipulation in general equilibrium models with sequential markets.

Suggested Citation

  • Klaus Ritzberger & Frank Milne, 2002. "Strategic pricing of equity issues," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 20(2), pages 271-294.
  • Handle: RePEc:spr:joecth:v:20:y:2002:i:2:p:271-294 Note: Received: March 14, 2000; revised version: May 15, 2001
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    References listed on IDEAS

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    Cited by:

    1. Silvia Rossetto, 2013. "IPO activity and information in secondary market prices," Annals of Finance, Springer, vol. 9(4), pages 667-687, November.
    2. Silvia Rossetto, 2008. "The price of rapid exit in venture capital-backed IPOs," Annals of Finance, Springer, vol. 4(1), pages 29-53, January.

    More about this item

    Keywords

    Asset markets; Game theory; General equilibrium; Market manipulation; Public offerings.;

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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