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Optimal IPO design with informed trading

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  • Fabrice Rousseau
  • Sarah Parlane

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.

Suggested Citation

  • Fabrice Rousseau & Sarah Parlane, 2007. "Optimal IPO design with informed trading," Working Papers 200706, School of Economics, University College Dublin.
    • Handle: RePEc:ucn:wpaper:200706
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    File URL: http://hdl.handle.net/10197/41
    File Function: First version, 2007
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    References listed on IDEAS

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    More about this item

    Keywords

    Initial Public Offer; Book-building; Auction; Informed trading; Dealer market; Going public; Securities; Secondary market;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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