An Analysis of Adverse Selection, Entrepreneurial Activity, and the Decision to Go Public

20 Pages Posted: 10 Apr 2010

See all articles by Amitrajeet A. Batabyal

Amitrajeet A. Batabyal

Rochester Institute of Technology (RIT) - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: April 8, 2010

Abstract

We study a regional economy with a large number of entrepreneurs who own firms and who want to go public. Specifically, our analysis focuses on the contractual interaction between a representative risk averse entrepreneur who owns a firm and a risk neutral monopolistic investment bank that proposes the terms of the initial public offering (IPO) that is placed in the market. First, we determine the terms of the IPO when there is full information. Second, we describe the attributes of the entrepreneur/bank contractual interaction when this interaction is framed as a screening problem with adverse selection. Third, we solve this screening problem fully and then we discuss the properties of the optimal solution. Finally, we point out how the preceding optimal solution is impacted when there is competition between investment banks.

Keywords: Adverse Selection, Asymmetric Information, Entrepreneur, Initial Public Offereing

JEL Classification: L26, R11, D81

Suggested Citation

Batabyal, Amitrajeet A., An Analysis of Adverse Selection, Entrepreneurial Activity, and the Decision to Go Public (April 8, 2010). Available at SSRN: https://ssrn.com/abstract=1586467 or http://dx.doi.org/10.2139/ssrn.1586467

Amitrajeet A. Batabyal (Contact Author)

Rochester Institute of Technology (RIT) - Department of Economics ( email )

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