Strategic pricing of equity issues |
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| Authors: | Frank Milne Klaus Ritzberger |
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| Affiliation: | (1) Queen's University, Department of Economics, Kingston Ontario K7L 3N6, CANADA (e-mail:milnef@qed.econ.queensu.ca) , CA;(2) Institute for Advanced Studies, Department of Economics and Finance, Stumpergasse 56, 1060 Vienna, AUSTRIA (e-mail: ritzbe@ihs.ac.at) , AT |
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| Abstract: | Summary. Consider a general equilibrium model where agents may behave strategically. Specifically, suppose some firm issues new shares. If the primary market price is controlled by the issuing institution and investors' expectations on future equity prices are constant in their share purchases, the share price on the primary market cannot exceed the secondary market share price. In certain cases this may imply strict underpricing of newly issued shares. If investors perceive an influence on future share prices overpriced issues may occur in equilibrium. This provides an example of strategic price manipulation in general equilibrium models with sequential markets. Received: March 14, 2000; revised version: May 15, 2001 |
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| Keywords: | and Phrases: Asset markets Game theory General equilibrium Market manipulation Public offerings. |
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