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IPO activity and information in secondary market prices

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  • Silvia Rossetto

Abstract

This paper explores the link between IPO underpricing and financial markets. In my model the IPO is a mean for a capital constrained initial investor to exit and thereby to raise funds for a new investment opportunity. This investor is privately informed vis-a-vis outside investors about the profitability of the new opportunity and the quality of the firm to be offered in the IPO. He can then use the offer price and the fraction of shares sold as signals of his private information. The model shows that underpricing is not only linked to firm’s characteristics, i.e. firm value, but to elements external to the firm, i.e. new investment profitability and financial markets characteristics. In particular higher market efficiency reduces the cost of listing. This results in lower underpricing and the listing of more valuable firm. Similarly, a higher lower bound of the new investment’s profitability reduces the information asymmetry and hence reduces underpricing and widens the range of firms listed. Copyright Springer-Verlag Berlin Heidelberg 2013

Suggested Citation

  • Silvia Rossetto, 2013. "IPO activity and information in secondary market prices," Annals of Finance, Springer, vol. 9(4), pages 667-687, November.
    • Handle: RePEc:kap:annfin:v:9:y:2013:i:4:p:667-687
    DOI: 10.1007/s10436-012-0213-2
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    More about this item

    Keywords

    Signalling; Disinvestment; Informational efficiency; C72; D82; G31; G32;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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