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The Pricing of Initial Public Offerings: A Dynamic Model with Information Production
Author(s) -
CHEMMANUR THOMAS J.
Publication year - 1993
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1993.tb04710.x
Subject(s) - initial public offering , business , production (economics) , equity (law) , private information retrieval , stock (firearms) , value (mathematics) , intrinsic value (animal ethics) , public information , microeconomics , private investment in public equity , value of information , enterprise value , stock market , secondary market , financial economics , industrial organization , economics , finance , stock exchange , private equity fund , philosophy , mathematics , mathematical economics , public administration , environmental ethics , law , horse , computer science , engineering , biology , paleontology , machine learning , political science , mechanical engineering , statistics
This paper presents an information‐theoretic model of IPO pricing in which insiders sell stock in both the IPO and the secondary market, have private information about their firm's prospects, and outsiders may engage in costly information production about the firm. High‐value firms, knowing they are going to pool with low‐value firms, induce outsiders to engage in information production by underpricing, which compensates outsiders for the cost of producing information. The information is reflected in the secondary market price of equity, giving a higher expected stock price for high‐value firms.