Market Making Contracts, Firm Value, and the IPO Decision

Hendrik Bessembinder, Jia Hao, Kuncheng Zheng

Research output: Contribution to journalArticle

11 Citations (Scopus)

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 enhance liquidity. Such contracts represent a market solution to a market imperfection, particularly for small, growth firms.

Original languageEnglish (US)
Pages (from-to)1997-2028
Number of pages32
JournalJournal of Finance
Volume70
Issue number5
DOIs
StatePublished - Oct 1 2015

Fingerprint

Market making
Firm value
Secondary market
Market makers
Liquidity
Firm growth
Market imperfections
Liquidity provision
Aftermarket
Market price
Asymmetric information
Fundamental values
Uncertainty
Market liquidity
Competitive market

ASJC Scopus subject areas

  • Finance
  • Accounting
  • Economics and Econometrics

Cite this

Market Making Contracts, Firm Value, and the IPO Decision. / Bessembinder, Hendrik; Hao, Jia; Zheng, Kuncheng.

In: Journal of Finance, Vol. 70, No. 5, 01.10.2015, p. 1997-2028.

Research output: Contribution to journalArticle

Bessembinder, Hendrik ; Hao, Jia ; Zheng, Kuncheng. / Market Making Contracts, Firm Value, and the IPO Decision. In: Journal of Finance. 2015 ; Vol. 70, No. 5. pp. 1997-2028.
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