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IPOs and Product Quality
Neal Stoughton University of New South Wales (UNSW) Kit Pong Wong University of Hong Kong - School of Economics and Finance Josef Zechner Vienna University of Economics and Business Administration Journal of Business Abstract: Given recent public attention paid to high-flying internet IPOs such as Yahoo and Amazon.com, this paper explores a product market motive for going public. We develop a model where consumers look to the stock price to make inferences. The model predicts that only better quality firms will go public. Effects of IPO announcements on rival firms' stock prices are related to inferences of market size and market share. The model also predicts that the likelihood of "hot issue" markets depends on the distribution of market size uncertainty and the degree of network externalities present in consumer preferences.
JEL Classifications: G24, G32 Accepted Paper SeriesDate posted: October 12, 2000 ; Last revised: July 25, 2001Suggested CitationContact Information
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