A truthful screening mechanism for improving information asymmetry in initial public offering transactions

A truthful screening mechanism for improving information asymmetry in initial public offering transactions

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Article ID: iaor200973215
Volume: 1
Issue: 2
Start Page Number: 96
End Page Number: 117
Publication Date: Jun 2009
Journal: Iranian Journal of Operations Research
Authors: ,
Keywords: investment
Abstract:

We propose a mechanism to deal with the asymmetric information which increases the phenomenon of underpricing in the Initial Public Offering (IPO) transactions. In this regard, we develop a truthful screening mechanism by which a screening agent could assess a firm that is going to be public during an IPO. A mathematical model is developed and solved to determine the incentives of these agencies so that they find it optimal to perform truthfully. We also pursue the case of cooperation of n such agents and compare it with the situation in which each agent works independently.

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