The Pricing of Initial Public Offerings: A Dynamic Model with Information Production



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    • Graduate School of Business, Columbia University. This paper is based on a revised version of Chapter III of the author's Ph.D. dissertation at New York University. For helpful discussions or comments, I thank Yakov Amihud, Ernest Bloch, Stephen Brown, Paolo Fulghieri, Martin Gruber, Kose John, Peter Lenk, David Nachman, Chandrasekhar Reddy, Jay Ritter, Anthony Saunders, Lema Senbet, Matt Spiegel, Marti Subrahmanyam, Jean-Luc Vila, Ram Wilner, and Charles Wilson, as well as participants in the October 1988 FMA meetings, December 1988 meetings of the Econometric Society, June 1989 meetings of the WFA, and seminars at Columbia University, University of Iowa, Northwestern University, New york University, University of Southern California, University of Utah, and University of Wisconsin. Special thanks to the editor, René Stulz, and three anonymous referees for several valuable suggestions which greatly improved this paper.


This paper presents an information-theoretic model of IPO pricing in which insiders sell stock in both the IPO and the secondary market, have private information about their firm's prospects, and outsiders may engage in costly information production about the firm. High-value firms, knowing they are going to pool with low-value firms, induce outsiders to engage in information production by underpricing, which compensates outsiders for the cost of producing information. The information is reflected in the secondary market price of equity, giving a higher expected stock price for high-value firms.