TY - JOUR

T1 - The market for firms

T2 - market signaling and overpricing

AU - Davis, Jerome Dean

AU - Keiding, Hans

PY - 2010

Y1 - 2010

N2 - In this paper, the pricing and sale of firms is approached from the owners' point of view. It is shown that there are very strong ex ante owner incentives to set prices of firm products or services below their short- term profit maximizing levels, since low prices signal low costs and as a consequence a higher sales value of the firm. Buyers take this signaling into consideration, but irrespective of their countermoves, the equilib- rium result may be a lowering of ex ante product prices, and an ex post market overvaluation of the firm. This model is utilized to suggest possible explanations to one of the more puzzling initial public offer (IPO) phenomena: the long run underperformance of IPO equities.

AB - In this paper, the pricing and sale of firms is approached from the owners' point of view. It is shown that there are very strong ex ante owner incentives to set prices of firm products or services below their short- term profit maximizing levels, since low prices signal low costs and as a consequence a higher sales value of the firm. Buyers take this signaling into consideration, but irrespective of their countermoves, the equilib- rium result may be a lowering of ex ante product prices, and an ex post market overvaluation of the firm. This model is utilized to suggest possible explanations to one of the more puzzling initial public offer (IPO) phenomena: the long run underperformance of IPO equities.

KW - Faculty of Social Sciences

KW - signaling

KW - IPO overpricing

U2 - 10.4236/ti.2010.13024

DO - 10.4236/ti.2010.13024

M3 - Journal article

VL - 1

SP - 205

EP - 210

JO - Technology and Investment

JF - Technology and Investment

SN - 2150-4059

IS - 3

ER -