Sequential Sales, Learning, and Cascades



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    • University of California, Los Angeles. I gratefully acknowledge the helpful discussions and comments of James Ang, Michael Brennan, Chris Barry (the discussant at the WFA 1990 meetings), Bhagwan Chowdhry, Kent Daniel, Milton Harris (the chairman of my Ph.D. thesis from which this paper derives), David Hirshleifer, Narasimhan Jegadeesh, Tim Opler, Jay Ritter, René Stulz, Sheridan Titman, Itzchak Venezia, an anonymous referee, and the workshop participants at seminars at The University of California at Los Angeles, The University of Chicago, and The University of Illinois at Champaign-Urbana, INSEAD, The 5th Symposium on Money, Banking, Finance and Insurance in Karlsruhe, and the NBER. An earlier version of this paper, titled “Sequential Sales, Path Dependence and Cascades,” was presented at the Western Finance Association 1990 conference. I gratefully acknowledge financial support from the Center for Finance and Real Estate and the Center for Entrepreneurial Studies, both at UCLA.


When IPO shares are sold sequentially, later potential investors can learn from the purchasing decisions of earlier investors. This can lead rapidly to “cascades” in which subsequent investors optimally ignore their private information and imitate earlier investors. Although rationing in this situation gives rise to a winner's curse, it is irrelevant. The model predicts that: (1) Offerings succeed or fail rapidly. (2) Demand can be so elastic that even risk-neutral issuers underprice to completely avoid failure. (3) Issuers with good inside information can price their shares so high that they sometimes fail. (4) An underwriter may want to reduce the communication among investors by spreading the selling effort over a more segmented market.