What is it about?
When a company goes public (an IPO), the issue price—the price at which shares are first sold—is typically negotiated between the company and a financial broker. Many studies assume that these two sides do not fully trust each other or share information, which is often used to explain IPO underpricing. This paper challenges that view. We show that issuers and brokers often benefit from openly sharing their information. When they do, they tend to agree on the optimal price, and traditional explanations of underpricing based on information asymmetry may no longer apply.
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Why is it important?
IPO underpricing affects company owners, investors, and capital market efficiency. Most existing explanations rely on persistent conflicts and information asymmetry between issuers and brokers. This paper shows that these assumptions may be overstated. By modeling how information is strategically exchanged before the IPO price is set, we demonstrate that issuers and brokers often have incentives to fully share information and align their expectations. This shifts the interpretation of IPO underpricing from a problem of hidden information to a result of rational strategic behavior, offering a new perspective for researchers, practitioners, and policymakers.
Perspectives
This paper reflects our view that the IPO literature has paid limited attention to the negotiation process between issuers and brokers. Many existing explanations of underpricing rely on assumptions about mistrust or hidden information that are rarely examined directly. By explicitly modeling this interaction, we interpret IPO pricing as a rational outcome of strategic behavior under shared information rather than as a simple incentive failure. We hope this perspective encourages further research that focuses on the pricing process itself, not only on observed IPO outcomes.
Michał Thlon
Uniwersytet Ekonomiczny w Krakowie
Read the Original
This page is a summary of: How is the issue price set? Strategic interactions between issuers and brokers in an IPO, Studies in Economics and Finance, October 2025, Emerald,
DOI: 10.1108/sef-11-2024-0835.
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