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The Dynamics of Going Public

Author

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  • Maria Cecilia BUSTAMANTE

    (University of Lausanne and Swiss Finance Institute)

Abstract

This paper develops a signalling game in which the decision to raise public equity is a real option of the firm. Firms may use multiple signals to reveal their type: the timing of the IPO, the fraction of shares issued and the underpricing of shares. The model provides a tractable approach for solving signalling games in a real options framework and predicts both IPO activity and underpricing conditional on adverse selection. In periods where adverse selection is less relevant (hot markets), there is higher IPO volume, younger firms go public and firms with worse investment prospects are overvalued. In periods where adverse selection is more relevant (cold markets), there is lower IPO volume, firms with better investment prospects accelerate their IPO and underprice more their shares with respect to worse firms to avoid imitation. The paper provides a rational approach to analyze underpricing and market timing. The empirical tests support the predictions that better firms go public earlier and underprice more their shares during cold IPO markets.

Suggested Citation

  • Maria Cecilia BUSTAMANTE, 2008. "The Dynamics of Going Public," Swiss Finance Institute Research Paper Series 08-46, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp0846
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    More about this item

    Keywords

    IPOs; SEOs; real options; signalling games; asymmetric information.;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • 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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