Structuring the Initial Offering: Who to Sell to and How to Do it
44 Pages Posted: 7 Apr 2004
Date Written: March 2004
This paper shows how the owner of a nonpublic firm, who wishes to maximize revenue from the sale of shares, should structure the sale. We develop a unified model of adverse selection in the retail market and mechanism design for information gathering that enables us to determine the optimal amount of information gathering before setting the issue price. We show that the need to induce truthtelling does not, without allocation restrictions, lead to underpricing when bookbuilding is conducted prior to an initial public offering. We obtain a number of new empirical predictions relating the information gathering decision and underpricing to characteristics of the bookbuilding process and issue characteristics such as issue size and uncertainty about share value.
Keywords: Mechanism design, IPOs
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