IDEAS home Printed from https://ideas.repec.org/a/wly/jnddns/v2016y2016i1n6327308.html

Equilibrium Signal and Purchase Decision in China’s IPO Net Roadshow: A Dynamic Game Approach

Author

Listed:
  • Yi Zhao
  • Dong Li

Abstract

The net roadshow has been dominant in China’s IPO (initial public offerings) roadshow structure. Considering the dynamic game with incomplete information between the issuer and investor during China’s IPO net roadshow, the quality of the letter of intent is presented as a discrete signal in this paper in accordance with China’s IPO net roadshow characteristics. A signaling game model is established to conclude the issuer’s equilibrium signal and the investor’s purchase action. The issuer disguised a letter of intent to uplift its quality if the disguising cost per share stands below the bidding spread. If the investor judges the letter of intent as high‐quality, the basis of purchase is that the opportunity cost per share is less than the expectation on the intrinsic value of the IPO stock. Otherwise the investor rejects purchasing on the condition that the opportunity cost outnumbers the valuation of intrinsic value. In conclusion, there exist unique separating equilibrium and pooling equilibrium as a perfect Bayesian Nash equilibrium, and the existence and uniqueness of their equilibrium domains have been verified by numerical simulation. Finally, the comprehensive empirical studies have validated only one separating and pooling equilibrium existing in China’s real‐world IPO market.

Suggested Citation

  • Yi Zhao & Dong Li, 2016. "Equilibrium Signal and Purchase Decision in China’s IPO Net Roadshow: A Dynamic Game Approach," Discrete Dynamics in Nature and Society, John Wiley & Sons, vol. 2016(1).
    • Handle: RePEc:wly:jnddns:v:2016:y:2016:i:1:n:6327308
    DOI: 10.1155/2016/6327308
    as

    Download full text from publisher

    File URL: https://doi.org/10.1155/2016/6327308
    Download Restriction: no
    File URL: https://libkey.io/10.1155/2016/6327308?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Alexander Ljungqvist & Vikram Nanda & Rajdeep Singh, 2006. "Hot Markets, Investor Sentiment, and IPO Pricing," The Journal of Business, University of Chicago Press, vol. 79(4), pages 1667-1702, July.
    2. Su Han Chan & Ko Wang & Jing Yang, 2009. "IPO Pricing Strategies with Deadweight and Search Costs," Journal of Real Estate Research, Taylor & Francis Journals, vol. 31(4), pages 481-542, January.
    3. Spence, Michael & Zeckhauser, Richard, 1971. "Insurance, Information, and Individual Action," American Economic Review, American Economic Association, vol. 61(2), pages 380-387, May.
    4. Andrew J. Leone & Steve Rock & Michael Willenborg, 2007. "Disclosure of Intended Use of Proceeds and Underpricing in Initial Public Offerings," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 45(1), pages 111-153, March.
    5. Cook, Douglas O. & Kieschnick, Robert & Van Ness, Robert A., 2006. "On the marketing of IPOs," Journal of Financial Economics, Elsevier, vol. 82(1), pages 35-61, October.
    6. Hsuan-Chi Chen & Cyuan-Jhan Jhou & Hsiu-Chuan Yeh, 2007. "Signalling by underwriter retention rate in the IPO market," Applied Economics, Taylor & Francis Journals, vol. 39(15), pages 1973-1983.
    7. Leung, Jeffery & Menyah, Kojo, 2006. "Issuer-oriented underpricing costs in initial public offers: Evidence from Hong Kong," Journal of Corporate Finance, Elsevier, vol. 12(5), pages 897-905, December.
    8. Su Han Chan & Ko Wang & Jing Yang, 2009. "IPO Pricing Strategies with Deadweight and Search Costs," Journal of Real Estate Research, American Real Estate Society, vol. 31(4), pages 481-542.
    9. Allen, Franklin & Faulhaber, Gerald R., 1989. "Signalling by underpricing in the IPO market," Journal of Financial Economics, Elsevier, vol. 23(2), pages 303-323, August.
    10. Stephen P. Ferris & (Grace) Qing Hao & (Stella) Min-Yu Liao, 2013. "The Effect of Issuer Conservatism on IPO Pricing and Performance," Review of Finance, European Finance Association, vol. 17(3), pages 993-1027.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Su Han Chan & Ko Wang & Jing Yang, 2009. "IPO Pricing Strategies with Deadweight and Search Costs," Journal of Real Estate Research, American Real Estate Society, vol. 31(4), pages 481-542.
    2. Paul B. McGuinness, 2016. "Post-IPO performance and its association with subscription cascades and issuers’ strategic-political importance," Review of Quantitative Finance and Accounting, Springer, vol. 46(2), pages 291-333, February.
    3. Duong, Huu Nhan & Goyal, Abhinav & Kallinterakis, Vasileios & Veeraraghavan, Madhu, 2022. "Democracy and the pricing of initial public offerings around the world," Journal of Financial Economics, Elsevier, vol. 145(1), pages 322-341.
    4. David C. Ling & Gianluca Marcato & Chen Zheng, 2022. "Does asset location and concentration explain REIT IPO valuation?," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 50(3), pages 672-706, September.
    5. Duong, Huu Nhan & Goyal, Abhinav & Rhee, S. Ghon, 2026. "Folklore narratives and IPO outcomes," Journal of Banking & Finance, Elsevier, vol. 182(C).
    6. Silvia Rossetto, 2008. "The price of rapid exit in venture capital-backed IPOs," Annals of Finance, Springer, vol. 4(1), pages 29-53, January.
    7. Ji Sun & Yi Zhou & Jiaguo (George) Wang & Jie (Michael) Guo, 2020. "Influence of media coverage and sentiment on seasoned equity offerings," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 60(S1), pages 557-585, April.
    8. Tiziana La Rocca, 2021. "Do prestigious underwriters shape IPO pricing? A meta-analytic review," Review of Managerial Science, Springer, vol. 15(3), pages 573-609, April.
    9. Ranganathan, Kavitha & Veeraraghavan, Madhu, 2023. "Pre-and-aftermarket IPO underpricing: Does use of proceeds disclosure matter?," Journal of Contemporary Accounting and Economics, Elsevier, vol. 19(3).
    10. Waqas Mehmood & Rasidah Mohd-Rashid & Yasir Abdullah & Ataul Karim Patwary & Attia Aman-Ullah, 2023. "Inclusive mapping of initial public offerings: a bibliometric and literature review study," Quality & Quantity: International Journal of Methodology, Springer, vol. 57(1), pages 655-700, February.
    11. Edwards, Amy K. & Hanley, Kathleen Weiss, 2010. "Short selling in initial public offerings," Journal of Financial Economics, Elsevier, vol. 98(1), pages 21-39, October.
    12. Michael O'Connor Keefe & David Gallagher, 2014. "Does the effect of revealed private information on initial public offering (IPO) first trading day return differ by IPO market heat?," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 54(3), pages 921-964, September.
    13. Iftikhar Ahmad & Izlin Ismail & Shahrin Saaid Shaharuddin, 2021. "Predictive Role of Ex Ante Strategic Firm Characteristics for Sustainable Initial Public Offering (IPO) Survival," Sustainability, MDPI, vol. 13(14), pages 1-26, July.
    14. Zhang, Zhi & Zhang, Di & Jiang, Senyang & Li, Ao & Yu, Wei, 2023. "The effect of language on IPO underpricing: Evidence from a multinational research," International Review of Financial Analysis, Elsevier, vol. 89(C).
    15. Chen, Yangyang & Goyal, Abhinav & Veeraraghavan, Madhu & Zolotoy, Leon, 2020. "Terrorist attacks, investor sentiment, and the pricing of initial public offerings," Journal of Corporate Finance, Elsevier, vol. 65(C).
    16. Jeon, Jin Q. & Lee, Cheolwoo & Nasser, Tareque & Via, M. Tony, 2015. "Multiple lead underwriter IPOs and firm visibility," Journal of Corporate Finance, Elsevier, vol. 32(C), pages 128-149.
    17. Chi, Yeguang & He, Jingbin & Ma, Xinru & Wu, Fei, 2023. "Air pollution and institutional investors' valuation bias during initial public offerings," Pacific-Basin Finance Journal, Elsevier, vol. 80(C).
    18. Bill Dimovski & Christopher Ratcliffe & Monica Keneley, 2017. "Another piece of the puzzle: REIT IPO underpricing after the financial crisis," Journal of Property Investment & Finance, Emerald Group Publishing Limited, vol. 35(3), pages 264-276, April.
    19. Byard, Donal & Darrough, Masako & Suh, Jangwon, 2019. "There is No Evidence that Mandatory IFRS Adoption Significantly Decreased IPO Underpricing," SocArXiv b56u2, Center for Open Science.
    20. Dumrongwong, Konpanas & Papangkorn, Suwongrat, 2025. "Happiness and IPO performance," Journal of Behavioral and Experimental Finance, Elsevier, vol. 46(C).

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wly:jnddns:v:2016:y:2016:i:1:n:6327308. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://onlinelibrary.wiley.com/journal/3059 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.