Initial Public Offerings: an Outlook through Game Theory

Résumé du document

Initial Public Offerings (IPOs) have become increasingly important in the contemporary economics and finance. They represent the entrance on a deep and liquid market with access to unlimited reserves of capital from all over the world. But IPOs can also appear as a short-term fund-raising tool, which was used during the high tech bubble in the late 1990s in new, innovative and invincible-looking start-up companies from the Silicon Valley. In those years, investment bankers (who set up IPOs for the companies going public) thrived and were apprehensive about the "kings of capitalism?. Since then, the euphoria vanished but IPOs continued to exist. Between 1980 and 2001, the number of IPOs in the US exceeded one per business day . The distribution was not equal: in 1999 and 2000 alone, 900 companies went public.

Extraits

[...] Main Characteristics of the State-initiated Offer Electricité de France is one of the biggest energy players in the world. Its IPO intervened in the context of European deregulation of energy markets and fierce competition among “national champions” in the EU. The company also needed new funds to finance its international development and reduce the burden of its debt of nearly 20 billion. Hence the idea of going public to raise much needed funds, after the government agreed to transform it from a state entity into a limited company in 2004. [...]

[...] But we can go beyond this explanation. In any sale, there is a risk for the uninformed buyer to overpay its purchase. This is especially true in an auction process, analyzed later on in this paper, but it can also happen (though less likely) in a traditional, book-building process when selected investors give their assessment of the value of the stock to be issued. In both cases, the price is either strongly influenced, or even determined, by the most optimistic forecaster among the investors. [...]

[...] In conclusion, bidding 90$ never improves Gaston Lagaffe's situation. In a similar way, bidding more than $100 never improves his situation and sometimes makes him win an auction he would have liked to lose. In the English auction, each bidder has a dominant strategy which consists in bidding exactly his valuation. This type of auction is strategically similar to a second price auction because in both cases bidders are spurred to bid their true value. The Dutch auction The name refers to the Dutch flowers which are sold in this way. [...]

[...] IPOs and Challenges to Market Efficiency 1. IPOs and the Issue of Information An IPO is an operation like no other. Introducing a new stock on the financial market presents the challenge of setting a starting price without knowing how much the asset is really worth. This is a major difference with the issuing of stock in the case of an already public company. The main question is therefore how to assess the right value of the asset. There are two sorts of value for a given object: a common value, assigned on the basis of its objective characteristics; and a personal value, specific to each individual. [...]

[...] Thus underpricing appears to be the least costly way to assure sufficient liquidity in the aftermarket, despite the initial loss of value for the company (which rewards the investors who have made the effort to gather information prior to the offer). But there is another way to guarantee the participation of retail investors to IPOs: through the state's intervention. This is common practice in France, with the flotation of state owned firms like France Telecom, GDF, EDF, SANEF and very soon ADP, with a portion of the equity to be listed being arbitrarily allocated through legislation to individual investors. [...]