The Role of Uninformed Investors in an Optimal Ipo Mechanism

Alexey Malakhov
2007 Social Science Research Network  
This paper explores optimal ways for a firm to sell its initial public offering (IPO) to a mix of informed and uninformed investors through an intermediary. I argue that uninformed investors provide a benchmark for informed investors, resulting in an endogenous constraint that affects the issuer's revenue. I conclude that higher revenues are achieved with higher numbers of uninformed investors participating in an IPO. Furthermore, the intermediary serves as the only credible provider of
more » ... ion about uninformed investors' realized demand to informed investors. This increases the issuer's expected revenue, and provides a rationale for substantial payments to the intermediary. JEL Classification: G24
doi:10.2139/ssrn.687167 fatcat:mqo47dhzgjhpzlzn77i5usgnrq