A model of dynamic information production for initial public offerings

Rafiqul Bhuyan*, Coşkun Çetin, Burhaneddin İzgi, Bakhtear Talukdar

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

Abstract

We develop a multi-period information-theoretic model of initial public offering (IPO) in the presence of an adverse selection problem that addresses both underpricing in an IPO and subsequent underperformance in the long run. In this model, information asymmetry exists among the owner of a firm going IPO, underwriter(s), informed analysts and uninformed investors. Information asymmetry between the owner and the investors is reduced through both the initial information production by some investors and the evaluations by informed analysts in the subsequent periods as new information arrives on the market. By incorporating future uncertainty, subsequent information revelation, certain firm-specific constraints and the actions of the agents, the optimal or sub-optimal actions of the agents are identified. The model explains why firms going public are underpriced at the IPO and, on average, underperform in the long run. The results are also compatible with social comparison explanations from a behavioral finance perspective.

Original languageEnglish
Pages (from-to)157-174
Number of pages18
JournalQuantitative Finance
Volume24
Issue number1
DOIs
Publication statusPublished - 2023

Bibliographical note

Publisher Copyright:
© 2023 Informa UK Limited, trading as Taylor & Francis Group.

Keywords

  • Bayesian equilibrium
  • Information asymmetry
  • Initial public offering
  • Social comparison

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