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Over-signaling vs Underpricing: The Role of Financial Intermediaries in Initial Public Offerings

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  • F. Adriani
  • LG Deidda

    ()

  • S. Sonderegger

Abstract

We consider a model of Initial Public Offerings (IPOs) where issuing firms of better quality are more reluctant to go public. IPOs either generate or destroy value depending on the type of the issuing firm, which is only observed by the issuer. We show that, when the issuer directly offers the shares to the investors, market breakdown occurs. This is caused by the issuer s attempts to signal his type through the offering price. Things change if we introduce a financial intermediary which - 1) acts as an underwriter,2) influences the offering price. Underwriting creates a wedge between the interests of the intermediary and those of the issuer. This allows trade with outside investors to be restored. A by-product of the conict of interest between issuer and intermediary is that trade is characterized by underpricing. In the benchmark case where her profits are zero, the intermediary acts as a screening device - she underwrites the shares only upon receiving positive information about the issuer.

Suggested Citation

  • F. Adriani & LG Deidda & S. Sonderegger, 2007. "Over-signaling vs Underpricing: The Role of Financial Intermediaries in Initial Public Offerings," Working Paper CRENoS 200714, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia.
  • Handle: RePEc:cns:cnscwp:200714
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    Cited by:

    1. M. Pitzalis & I. Sulis & M. Porcu, 2008. "Differences of Cultural Capital among Students in Transition to University. Some First Survey Evidences," Working Paper CRENoS 200805, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia.
    2. I. Sulis & M. Porcu, 2008. "Assessing the Effectiveness of a Stochastic Regression Imputation Method for Ordered Categorical Data," Working Paper CRENoS 200804, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia.

    More about this item

    Keywords

    ipo; signaling; financial intermediary; underwriting;

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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