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The Pricing of Initial Public Offerings: A Dynamic Model with Information Production

461 citations0/0 files storedThe Journal of Finance

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Financial Markets and Investment Strategies Corporate Finance and Governance Stochastic processes and financial applications

Abstract

ABSTRACT This paper presents an information‐theoretic model of IPO pricing in which insiders sell stock in both the IPO and the secondary market, have private information about their firm's prospects, and outsiders may engage in costly information production about the firm. High‐value firms, knowing they are going to pool with low‐value firms, induce outsiders to engage in information production by underpricing, which compensates outsiders for the cost of producing information. The information is reflected in the secondary market price of equity, giving a higher expected stock price for high‐value firms.

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References

1977The Determination of Financial Structure: The Incentive-Signalling Approach 1977INFORMATIONAL ASYMMETRIES, FINANCIAL STRUCTURE, AND FINANCIAL INTERMEDIATION 1977Informational Asymmetries, Financial Structure, and Financial Intermediation 1991The Long‐Run Performance of initial Public Offerings 1986Why new issues are underpriced 1986Investment banking, reputation, and the underpricing of initial public offerings 1990Initial Public Offerings and Underwriter Reputation 1989How investment bankers determine the offer price and allocation of new issues

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2002Strategic IPO underpricing, information momentum, and lockup expiration selling 2003Underpricing and long-term performance of IPOs in China 2004Management quality, certification, and initial public offerings 2011Local Underwriter Oligopolies and IPO Underpricing 1998IPO-mechanisms, monitoring and ownership structure11We would like to thank the referee, Larry Benveniste, and the editor, William Schwert, as well as Bruno Biais, Patrik Bolton, Susanne Espenlaub, Michael Fishman, Thierry Foucault, Gunther Franke, Julian Franks, Mark Grinblatt, Jean Jacque Laffont, Alexander Ljungqvist, Ernst Maug, Gerhard Orosel, Pegaret Pichler, Raguram Rajan, Jay Ritter, Ailsa Röell, Kristian Rydquist, Jean Tirole, Elu von Thadden, Ivo Welch, William Wilhelm, Joe Williams and Andrew Winton for helpful comments. This paper has been presented at the University of Alberta, Baruch College, the Free University of Brussels, the University of Gothenburg, HEC, the University of California, Irvine, the University of Lausanne, the London School of Economics, the University of Odense, Stockholm School of Economics, the University of British Columbia, UCLA, the University of Utah, the CEPR conferences in Tolouse and Gerzensee, the American Finance Association, the Western Finance Association and the European Finance Association. This paper was written while Stoughton visited the University of Vienna. He expresses his appreciation to the faculty and staff for an enjoyable stay.

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