IPO Syndicates, Private Foreknowledge, and the Economics of Excess Search

33 Pages Posted: 29 Jun 2000  

Yoram Barzel

University of Washington

Michel A. Habib

University of Zurich; Ecole Polytechnique Fédérale de Lausanne - Ecole Polytechnique Fédérale de Lausanne

D. Bruce Johnsen

George Mason University - School of Law; PERC - Property and Environment Research Center

Date Written: 2000

Abstract

We distinguish between discovery information and private foreknowledge in the valuation of initial public offerings of corporate securities. An underwriter gathers discovery information to value and price the issue. The issuing firm relies on this information to make the optimal investment decision. In the absence of syndicate restrictions, the inevitable errors in pricing give outsiders the opportunity to acquire private foreknowledge to effect wealth transfers from the underwriter. Because this activity is costly but has no influence on the issuer's investment, it reduces the parties' joint wealth. They therefore have an incentive to organize their arrangements to avoid the associated losses. We show how various features of the syndicate system perform this function, increasing the returns to investment banking and decreasing the cost of capital to issuing firms.

JEL Classification: G21

Suggested Citation

Barzel, Yoram and Habib, Michel A. and Johnsen, D. Bruce, IPO Syndicates, Private Foreknowledge, and the Economics of Excess Search (2000). George Mason Law & Economics Research Paper No. 00-29. Available at SSRN: https://ssrn.com/abstract=232242 or http://dx.doi.org/10.2139/ssrn.232242

Yoram Barzel (Contact Author)

University of Washington ( email )

Box 353330
Seattle, WA 98195-3330
United States
206-543-2510 (Phone)
206-685-7477 (Fax)

Michel A. Habib

University of Zurich ( email )

Plattenstrasse 14
Zurich, 8032
Switzerland
41-44-634-2507 (Phone)
41-44-634-4903 (Fax)

HOME PAGE: http://www.isb.uzh.ch/institut/profs/mhabib.htm

Ecole Polytechnique Fédérale de Lausanne - Ecole Polytechnique Fédérale de Lausanne ( email )

c/o University of Geneve
40, Bd du Pont-d'Arve
1211 Geneva, CH-6900
Switzerland

D. Bruce Johnsen

George Mason University - School of Law ( email )

3301 Fairfax Drive
Arlington, VA 22201
United States
703-993-8066 (Phone)
703-993-8088 (Fax)

PERC - Property and Environment Research Center

2048 Analysis Drive
Suite A
Bozeman, MT 59718
United States

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