Pre-Ipo Markets

Posted: 20 Jul 2003

See all articles by Francesca Cornelli

Francesca Cornelli

London Business School; Centre for Economic Policy Research (CEPR)

Alexander Ljungqvist

Stockholm School of Economics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Research Institute of Industrial Economics (IFN)

David Goldreich

University of Toronto - Rotman School of Management

Date Written: March 1, 2003

Abstract

This paper develops a model of IPOs in which book building and a grey market (i.e. a when-issued market) take place simultaneously. While book building contains information about the fundamental value of the issue and is kept confidential, the grey market reflects the opinion of retail investors and is publicly observed. We show that when the grey market price is high relative to the fundamental value the underwriter will set the offer price close to the grey market price, but when the grey market price is low, he will set the offer price based on the fundamentals. This creates an asymmetry in the issue price and the aftermarket price relative to the grey market. We test the empirical implications of the model using data from grey market prices for European IPOs.

Suggested Citation

Cornelli, Francesca and Ljungqvist, Alexander and Goldreich, David, Pre-Ipo Markets (March 1, 2003). EFA 2003 Annual Conference Paper No. 968, Available at SSRN: https://ssrn.com/abstract=423862

Francesca Cornelli (Contact Author)

London Business School ( email )

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Centre for Economic Policy Research (CEPR)

London
United Kingdom

Alexander Ljungqvist

Stockholm School of Economics ( email )

111 60 Stockholm
Sweden

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
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Belgium

Research Institute of Industrial Economics (IFN) ( email )

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Sweden

David Goldreich

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada
416-946-0833 (Phone)

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