An optimal IPO mechanism

By Bruno Biais, Peter Bossaerts, Jean-Charles Rochet. 2002

190 citations recorded by the source corpus.

We analyse the optimal Initial Public Offering (IPO) mechanism in a multidimensional adverse selection setting where institutional investors have private information about the market valuation of the shares, the intermediary has private information about the demand, and the institutional investors and intermediary collude. Theorem 1 states that uniform pricing is optimal (all agents pay the same price) and characterizes the IPO price in terms of conditional expectations. Theorem 2 states that the optimal mechanism can be implemented by a non-linear price schedule decreasing in the quantity allocated to retail investors. This is similar to IPO procedures used in the U.K. and France. Relying on French IPO data we perform a GMM structural estimation and test of the model. The price schedule is estimated and the conditions characterizing the optimal mechanism are not rejected.

Subfields: Accounting, Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/abfa7659d5fa92eb7314722af38c1adb2f3639d9

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Citations in the corpus

IPO Market Timing (2005, background): “…Benveniste and Spindt (1989), this line of research has emphasized the costs of going public that arise when investors possess private information about issuers’ value [Benveniste and Wilhelm (1990), Maksimovic and Pichler (2002), Sherman and Titman (2002), and Biais, Bossaerts, and Rochet (2002)].”
IPO Pricing in the Dot-Com Bubble (2003, methodology): “We test this hypothesis from the mechanism design perspective suggested by Benveniste and Spindt (1989) and generalized by Biais et al. (2000) to incorporate the conflict of interest between issuers and their underwriters studied by Baron (1982).”
Global trends in IPO methods: Book building versus auctions with endogenous entry (2005, background): “Biais et al. (2002) examine the other extreme, assuming that the underwriter colludes with all informed investors 8High or low signals could be interpreted as the detection of favorable or unfavorable information on the market value of a firm that was not discovered by the underwriter.”
Differences between European and American IPO Markets (2003, background): “Biais et al. (2002) analyse the optimal IPO pricing and allocation mechanism in a model where there is both asymmetric information and an agency problem between issuers and underwriters.”
The Real Effects of Financial Markets (2012, unknown): “See, for example, Rock (1986), Benveniste and Spindt (1989), Benveniste and Wilhelm (1990), and, Biais, Bossaerts, and Rochet (2002).”
Incentives for Information Production in Markets where Prices Affect Real Investment (2016, unknown): “An important feature of the equilibrium given by (6) and ( 7 ) is that the investment is undertaken”
Auctions vs. Bookbuilding and the Control of Underpricing in Hot IPO Markets (2003, result): “This result provides empirical support for the theoretical work by Biais, Bossaerts, and Rochet (2002), who suggest the auction procedure is optimal.”