2015
DOI: 10.1111/jofi.12285
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Market Making Contracts, Firm Value, and the IPO Decision

Abstract: We examine the effects of secondary market liquidity on firm value and the IPO decision. Competitive aftermarket liquidity provision is associated with reduced welfare and a discounted secondary market price that can dissuade IPOs. The competitive market fails in particular for firms or at times when uncertainty regarding fundamental value and asymmetric information are large in combination. In these cases, firm value and welfare are improved by a contract where the firm engages a designated market maker to en… Show more

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Cited by 59 publications
(12 citation statements)
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“…Huang and Wang (2010) propose a model in which provision of liquidity is endogenous, finding that mandating participation tends to improve welfare, but that the welfare effects of lowering costs for liquidity provision per se are ambiguous. In a similar vein, Bessembinder et al (2015) present a model in which a firm can sell an asset to an investor in an IPO, with the option of paying a designated market maker (DMM) in exchange for liquidity provision in a secondary market. When the secondary market is illiquid due to asymmetric information and uncertainty regarding the asset's fundamental value, social welfare can be improved if the firm enters into a DMM contract.…”
Section: Related Workmentioning
confidence: 99%
See 1 more Smart Citation
“…Huang and Wang (2010) propose a model in which provision of liquidity is endogenous, finding that mandating participation tends to improve welfare, but that the welfare effects of lowering costs for liquidity provision per se are ambiguous. In a similar vein, Bessembinder et al (2015) present a model in which a firm can sell an asset to an investor in an IPO, with the option of paying a designated market maker (DMM) in exchange for liquidity provision in a secondary market. When the secondary market is illiquid due to asymmetric information and uncertainty regarding the asset's fundamental value, social welfare can be improved if the firm enters into a DMM contract.…”
Section: Related Workmentioning
confidence: 99%
“…Although liquidity and price discovery are generally expected to be positive factors for market performance and therefore welfare, there has been a notable dearth of prior research modeling this directly. Of the existing work addressing welfare, the focus has been on the need for an affirmative MM obligation due to adverse selection (Bessembinder, Hao, & Lemmon, 2011;Bessembinder, Hao, & Zheng, 2015), the cost structure of market participation in supplying liquidity (Huang & Wang, 2010), and trading mechanisms to incentivize market making (Brusco & Jackson, 1999).…”
Section: Introductionmentioning
confidence: 99%
“…Due to these characteristics, the IPOs listed on the ACE Market are very difficult to be valued; hence, they are exposed to greater valuation uncertainties. Bessembinder, Hao, and Zheng (2015) also associated younger, smaller, and growth-oriented firms to be of high uncertainty in their fundamental values, hence higher levels of information asymmetry. It is anticipated that segregation of the samples based on listing board would be more efficient at gauging the level of information asymmetry.…”
Section: Methodsmentioning
confidence: 99%
“…The main implication behind information asymmetry is that the issuing firms' insiders know the real value of their business, but they are unable to credibly communicate their value to the market, especially to future investors. According to Bessembinder, Hao and Zheng (2015), a market failure occurs in particular to firms like these or at times when the mixture of confidence regarding asset value is low, and the possibility of information asymmetry is high. However, the signalling theory has provided a solution to the information asymmetry dilemma, by communicating the superior quality of new issuing firms to potential investors.…”
Section: Literature Review and Hypothesesmentioning
confidence: 99%