Optimal Initial Public O¤ering design with aftermarket trading

Fabrice Rousseau and Sarah Parlane

Economics Department Working Paper Series from Department of Economics, National University of Ireland - Maynooth

Abstract: We characterize the optimal pricing and allocation of shares in the presence of distinct adverse selection problems. Some investors have private information at the time of the IPO and sell their shares in the after-market upon facing liquidity needs. Others learn their private interest in the after-market, and sell their shares strategically. The optimal mechanism trades-o¤ informational rents and rents to strategic traders. Flipping facilitates truthful information revelation. When liquidity needs are likely, it is optimal to allocate all shares to investors informed at the IPO stage. Otherwise, some shares are allocated to those who trade strategically in the after-market.

Pages: 41 pages
Date: 2009
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