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Searching in the Pre-IPO Market-Interaction between Private Firms and Investment Banks

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Listed:
  • Chung Chen
  • Milena Petrova
  • Garrison Hongyu Song

Abstract

We are the first to set up a random search based model to describe the pre-IPO market searching and matching process between private firms with intent to sell equity in an IPO and investment banks (IB) that underwrite the issue. Due to the wide existence of the market search friction, the necessary time is required in order to form a strategic pair between a private firm and an investment bank for a successful IPO. We derive a closed-form formula for the investment bank’s share of profit from an IPO transaction at the market equilibrium. The calibrated simulation result for this value is consistent with the “seven percent solution†initially identified by Chen and Ritter (2000). Our model suggests that IPO underpricing is not a deterministic phenomenon but an empirical observation, the existence of which largely originates from the market-wide co-movement between the total gross proceeds of each IPO and the total number of successful IPOs.Â

Suggested Citation

  • Chung Chen & Milena Petrova & Garrison Hongyu Song, 2015. "Searching in the Pre-IPO Market-Interaction between Private Firms and Investment Banks," Accounting and Finance Research, Sciedu Press, vol. 4(4), pages 147-147, November.
    • Handle: RePEc:jfr:afr111:v:4:y:2015:i:4:p:147
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    References listed on IDEAS

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    1. Malcolm Baker & Jeffrey Wurgler, 2000. "The Equity Share in New Issues and Aggregate Stock Returns," Journal of Finance, American Finance Association, vol. 55(5), pages 2219-2257, October.
    2. Tim Loughran & Jay R. Ritter, 2002. "Why Don't Issuers Get Upset About Leaving Money on the Table in IPOs?," The Review of Financial Studies, Society for Financial Studies, vol. 15(2), pages 413-444, March.
    3. Nicolas L. Jacquet & Serene Tan, 2007. "On the Segmentation of Markets," Journal of Political Economy, University of Chicago Press, vol. 115(4), pages 639-664, August.
    4. Ricardo Lagos & Guillaume Rocheteau, 2007. "Search in Asset Markets: Market Structure, Liquidity, and Welfare," American Economic Review, American Economic Association, vol. 97(2), pages 198-202, May.
    5. Tim Loughran & Jay Ritter, 2004. "Why Has IPO Underpricing Changed Over Time?," Financial Management, Financial Management Association, vol. 33(3), Fall.
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    Cited by:

    1. Garrison Hongyu Song, 2022. "Capital Mobility vs. Labor Mobility:Theory and Implications," International Journal of Economics and Financial Issues, Econjournals, vol. 12(4), pages 47-55, July.

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    More about this item

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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