lec17_with_answers_up_to_where_we_got

lec17_with_answers_up_to_where_we_got - Econ 138 Financial...

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Econ 138 Financial and Behavioral Economics Lecture 17: Asymmetric Information: IPOs and Dividends Ulrike Malmendier UC Berkeley Th, March 20, 2008
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PS 3 due in class, today. PS 4 will be posted today, due on Tu, 4/1 Today’s main topic, dividends, will lead us to a more complex model; I am afraid we will get only through half of it ... To make it easier: These slides are the material for this class and for most of next class (to give you a chance to read in advance since the next class will be shortly before midterm.)
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1 Corporate Financing and Asymmetric Informa- tion 4. Application: IPO Underpricing Basic stylized facts: In US, average underpricing is about 15%; higher in best e ff ort o ff erings. Korea, Thailand, Maleysia, Brazil: 60-80% European countries (Germany, Belgium, France): 3-10% Can asymmetric information explain IPO underpricing? Models underpricing as a rational equilibrium.
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Model assumptions: Usual assumptions (privately known success probabilities p for good fi rms and q for bad fi rms). Firms have assets A > 0 . Assets can be pledged to investors, but also have full value to fi rm. We consider contracts { R m , 0 } plus A goes to (‘is pledged to’) investors.
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Further assumptions: Denote with R g m the rent paid to a good fi rm under symmetric infor- mation: p ( R R g m ) + A = I ⇐⇒ R g m = R 1 p ( I A ) Assume I > qR + A , but I pR + A Interpretation? Answer: Only good fi rm creditworthy / has enough pledgeable in- come to obtain fi nancing. Also assume: A < qR g m . Interpretation? Answer: Bad fi rm mimics good fi rm. If fi nancing then [ αp + (1 α ) q ]( R R m ) + A = I ⇐⇒ R m = R I A αp + (1 α ) q
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Alternatively, fi nancing may not take place! = In both cases, utility of good fi rms reduced due to presence of bad types ( R m < R g m or 0 < R g m ). Question : Can we fi nd a contract that is unappealing to the bad type, still let the investor break even, and make the good type better o ff (than the pooling contract, which both the good and the bad types sign)?
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Consider a contract that sets the change in expected utility for the bad fi rm from entering the contract equal to 0 : qR m A = 0 , so R m = A q . Note: Expected utility of bad fi rm from not entering the contract is A , total expected utility of bad fi rm from entering the contract is qR m = A .
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