Firm Value and the Choice of Offering Method in Initial Public Offerings



    Doctoral CandidateSearch for more papers by this author
    • Doctoral Candidate, Cornell University. Currently a Visiting Assistant Professor of Finance at The State University of New York at Buffalo. I would like to thank George Oldfield, Robert Jarrow, and Maureen O'Hara for their support and comments. I would also like to thank Robert G. Hansen, Mark Grinblatt, Chris Barry, and especially Patrick Martin for their valuable comments. This paper was presented at the annual meeting of the American Finance Association in New York on December 29, 1988 under the title “Initial Public Offerings: An Asymmetric Information Approach.”


A firm raising capital in an initial public offering faces the problems of choosing between a firm-commitment and a best-efforts offering and of how to convey information about its value to potential investors. The offering method chosen affects both the firm's cost of obtaining capital and investors' perceptions about firm value. A partially pooling, partially separating equilibrium is found where high-valued firms have information about their values revealed in a firm-commitment offering, while low-valued firms use best-efforts offerings and are unable to distinguish themselves from other firms.