Optimal IPO design with informed trading

Fabrice Rousseau and Sarah Parlane

No 200706, Working Papers from School of Economics, University College Dublin

Abstract: We characterize optimal IPO design in the presence of distinct adverse selection problems: one affecting the IPO stage and one arising in the after-market. Allocating shares to an investor with superior information in the after-market depresses the share?s value to less informed investors. However, because it facilitates truthful interest report at the IPO stage it increases the expected offer price provided disadvantaged investors are suffciently unlikely to flip their share. We compare the book-building's outcome to that of uniform price auction. The auction can enhance the expected offer price only if it systematically allocates a share to the strategic trader.

Keywords: Initial Public Offer; Book-building; Auction; Informed trading; Dealer market; Going public; Securities; Secondary market (search for similar items in EconPapers)
JEL-codes: G24 G32 (search for similar items in EconPapers)
Date: 2007-05
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http://hdl.handle.net/10197/41 First version, 2007 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:ucn:wpaper:200706

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