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

Letters in Spatial and Resource Sciences, Vol. 3, No. 2, pp. 79-90, 2010

Posted: 12 Jul 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: July 12, 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: Asymmetric Information, Entrepreneur, Initial Public Offering, Investment Bank, Uncertainty

JEL Classification: L26, R11, D81

Suggested Citation

Batabyal, Amitrajeet A., An Analysis of Adverse Selection, Entrepreneurial Activity, and the Decision to Go Public (July 12, 2010). Letters in Spatial and Resource Sciences, Vol. 3, No. 2, pp. 79-90, 2010, Available at SSRN: https://ssrn.com/abstract=1639189

Amitrajeet A. Batabyal (Contact Author)

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

92 Lomb Memorial Drive
Rochester, NY 14623-5604
United States
585-475-2805 (Phone)
585-475-5777 (Fax)

HOME PAGE: http://people.rit.edu/aabgsh

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
381
PlumX Metrics