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Rafał Sieradzki

Rafał Sieradzki

is an Assistant Professor of Finance at the Department of Economics, Cracow University of Economics (Poland). Before he worked as an economic expert in the Financial System Department at the National Bank of Poland. His research areas cover equity, bond and derivatives markets and the real economy. He is an author and co-author of many monographs, articles and reports and court expert in financial markets and risk management.

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Grzegorz Kosiorowski, Rafał Sieradzki, Michał Thlon: Game-theoretic approach to IPO underpricing: issuer vs broker

Issuer and broker that are involved in an Initial Public Offering play a game in which they have to agree on the issue price. In a situation when both parties are risk neutral the issuer will tend to set the price as high as possible because this maximizes his proceeds from the IPO given the number of sold shares is fixed. On the other hand, the broker tries to lower the issue price because this maximizes the probability of selling all offered shares and at the same time to minimize his level of effort. We prove that the behavior of the issuer and the broker completely change if we assume that both parties are risk averse. Bearing in mind that the issuer is more risk averse than the broker because he carries a considerable fixed cost hiring the broker. In this situation the issuer will bargain with the broker to lower the issue price and the broker will try to set this price higher.

Last modified: 2019.09.10.