The effect of public information on the timing and pricing of IPOs

This dissertation examines the effect of publicly observable information on the timing and pricing of initial public offerings (IPOs). This research fills an important gap in the existing corporate finance literature, which has focused primarily on the impact of asymmetric information between the different participants in the IPO process.; Chapter 1, The Timing of Initial Public Offerings: A Real Option Approach, develops a dynamic model of the going public decision for a firm. The key assumption is that investors will value the private firm using the observable market prices of other firms from the same industry. By treating the IPO decision as a real option the model explicitly incorporates the opportunity cost associated with going public today as opposed to some future date. With a stochastic evolution of prices it is only optimal to exercise the option after an abnormal price run-up. Since the firm will never go public after market values fall, the model provides a rationalization for the clustering of IPOs near market valuation peaks that does not rely on asymmetric information.; Chapter 2, The Effect of Uncertainty on the Underpricing of IPOs, considers the circumstances under which uncertainty will affect the pricing of the IPO. I show that it is the uncertainty over the initial secondary market price that is relevant. If sufficient information is generated in the primary market, and the initial market price is known for certain, there is no need to underprice. This is true even if there is residual uncertainty about the firm value. The underpricing is the premium the issuer pays to be insured against an adverse market reception.; The final chapter, The Coordinating Role of Public Information in Hot Market IPOs, develops a game of investor participation in IPOs. Institutional investors exploit their preferential allocation to request shares in the underpriced hot IPOs. A high public signal, prevalent in a hot market, coordinates investors to buy, even if there private signals are low. An offering expected to be hot becomes hot. The high public signal perpetuates the hot market, and leads to higher market prices.