Initial Public Offerings an Outlook Through Game Theory

Initial Public Offerings: An Outlook through Game Theory

Initial Public Offerings (IPOs) have a very special place in contemporary economics and finance. They represent the entrance on a deep and liquid market with access to almost unlimited reserves of capital from all over the world. But IPOs appear also as a short-term fund-raising tool, especially used during the high tech bubble of the late 1990s from 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 sacred “kings of capitalism” by The Economist. Since then, the euphoria vanished but IPOs continued at a respectable pace.

Between 1980 and 2001, the number of IPOs in the US exceeded one per business day[1]. The distribution was not equal: in 1999 and 2000 alone, 900 companies went public. What is more, the IPO business has reached global importance[2], raising $167 billion around the world in 2005 with 1537 operations. During the period 1998-2004, North America represented 27% of the global market, Europe, Africa and the Middle East combined 42% and Asia-Pacific 31%. The trends of globalization are thus reflecting on the IPO business worldwide: dominance of the US market (on a country basis comparison) and rise of East Asia (especially China).

In a system dominated by market financing, flotation appears often to be a mandatory step in the life of a company above a certain size. We do not discuss in this paper IPOs under this perspective of structural necessity; rather we question the short-term stakes of going public. Besides the strategic choice to be listed on the stock market, what are the immediate objectives of an IPO? It has certainly become, especially since the internet bubble, a corporate financing tool, along with private equity and mergers and acquisitions, aimed at raising funds in a short period of time. Thus, we consider here IPOs under this...