A theory of negotiated equity financing |
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| Authors: | Giammarino, RM Lewis, T |
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| Affiliation: | 1 Faculty of Commerce and Business Administration, University of British Columbia, Vancouver, BC V6T 1Y8, Canada
2 University of California, Davis, USA |
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| Abstract: | We examine the sale of equity within the context of a modelof negotiation between a firm and a less well informed purchaser.We introduce a simple form of negotiation by allowing the firmto set the price of the issue and by assuming that the purchaseis a financier-underwriter who acts strategically. This transactionis analyzed as a noncooperative game, and we identify sequentialequilibria that are consistent with observed behavior: namelythat negotiations occasionally fail, that market reactions toequity offers are not uniformly negative, and that equity placementsare often underpriced. |
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