Messages from market to management: the case of IPOs

An IPO's initial return contains new information about the true value of the firm and, hence, provides vital feedback for the investment decision. A high initial return encourages managers to expand, while a lower than expected post-IPO price leads to a reduction of the capital budget. Information production by market participants increases the precision of the market feedback captured in the first competitively determined stock price. Managers can entice investors to produce more information by selling larger stakes at lower prices. A too low offer price, however, attracts uninformed investors and decreases information production.