A Theory of Negotiated Equity Financing

Ronald M. Giammarino; Tracy Lewis

doi:10.1093/rfs/1.3.265

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A Theory of Negotiated Equity Financing

Ronald M. Giammarino¹; Tracy Lewis²

¹ University of British Columbia · ² University of California, Davis

Review of Financial Studies 1988

We examine the sale of equity within the context of a model of negotiation between a firm and a less well informed purchaser. We introduce a simple form of negotiation by allowing the firm to set the price of the issue and by assuming that the purchase is a financier-underwriter who acts strategically. This transaction is analyzed as a noncooperative game, and we identify sequential equilibria that are consistent with observed behavior: namely that negotiations occasionally fail, that market reactions to equity offers are not uniformly negative, and that equity placements are often underpriced.

DOI: 10.1093/rfs/1.3.265
Volume: 1 (3)
Pages: 265-288
Language: en
Export: BibTeX
Sources: openalex crossref