Maybe I’m being slow: I don’t understand what explanation you refer to. You give arguments for why each of the groups involved in the IPO either had no motive, or no power, to over-price the stock; but I don’t see where you give an alternate explanation. I suspect an underestimated inferential distance; can you clarify?
It’s mostly in the first section of the linked article. In brief, business insiders (Zuckerberg et al) get paid the IPO price for their shares. Any increase from that price accrues to whoever bought first.
In recent history, that was investment banker insiders, not business insiders (ignoring for a moment the retained holdings of the business insiders). That windfall is practically the definition of positional rent since it exists only because the I-bankers are the conduits between private companies and the public market. Remember that the I-bankers were also paid a large fee by Facebook to facilitate the IPO. And any first-day-IPO profits are practically risk free to the I-bank insiders (especially before the Facebook IPO, when every offering was expected to jump a bit in price).
In short, I think Zuckerberg analyzed the situation and decided to set the price to maximize the proportion of the cash created by the IPO that ended up in the hands of business insiders rather than I-bank insiders.
It’s possible that business insiders like Zuckerberg care about the share price. But they are independently wealthy regardless of the shares. And this close to the IPO, securities laws make the remaining insider holdings somewhat illiquid. And business insiders keep shares to retain control—wealth maximization is important, but not an immediate focus.
One could spin a story about how opening day performance of an IPO is good for the company—but I’m not persuaded. And even if that were true, does it justify what is effectively transferring wealth from business insiders to I-bank insiders?
Ok, now I see what you’re saying. However, it seems to me that every pre-IPO shareholder in every company has an incentive, from this argument, to push for a higher IPO price, while the bankers have an incentive to hold the price down. So what made Facebook unusual?
That aside, your point remains good for showing that my speculation is probably off, even though it doesn’t in itself explain Facebook’s trajectory.
I-Banker incentives are complicated. On the one hand, potential clients select among them based on their ability to generate wealth for the client (pushing IPO prices up). On the other hand, they have tremendous opportunity for self-dealing transactions (pushing the IPO price down). The balance is apparently in flux.
Facebook may have been unusual because Zuckerberg’s particular special skills seem to resolve around analyzing and monetizing social interactions. Those skills may have helped him maneuver the I-bankers better than the average going-public entrepreneur.
In a couple years we’ll know whether the Facebook IPO was a trend or a blip in the pattern of IPOs. Blip supports the Zuckerberg-IPO-insights theory, while a larger trend suggests the opposite.
Maybe I’m being slow: I don’t understand what explanation you refer to. You give arguments for why each of the groups involved in the IPO either had no motive, or no power, to over-price the stock; but I don’t see where you give an alternate explanation. I suspect an underestimated inferential distance; can you clarify?
It’s mostly in the first section of the linked article. In brief, business insiders (Zuckerberg et al) get paid the IPO price for their shares. Any increase from that price accrues to whoever bought first.
In recent history, that was investment banker insiders, not business insiders (ignoring for a moment the retained holdings of the business insiders). That windfall is practically the definition of positional rent since it exists only because the I-bankers are the conduits between private companies and the public market. Remember that the I-bankers were also paid a large fee by Facebook to facilitate the IPO. And any first-day-IPO profits are practically risk free to the I-bank insiders (especially before the Facebook IPO, when every offering was expected to jump a bit in price).
In short, I think Zuckerberg analyzed the situation and decided to set the price to maximize the proportion of the cash created by the IPO that ended up in the hands of business insiders rather than I-bank insiders.
It’s possible that business insiders like Zuckerberg care about the share price. But they are independently wealthy regardless of the shares. And this close to the IPO, securities laws make the remaining insider holdings somewhat illiquid. And business insiders keep shares to retain control—wealth maximization is important, but not an immediate focus.
One could spin a story about how opening day performance of an IPO is good for the company—but I’m not persuaded. And even if that were true, does it justify what is effectively transferring wealth from business insiders to I-bank insiders?
Ok, now I see what you’re saying. However, it seems to me that every pre-IPO shareholder in every company has an incentive, from this argument, to push for a higher IPO price, while the bankers have an incentive to hold the price down. So what made Facebook unusual?
That aside, your point remains good for showing that my speculation is probably off, even though it doesn’t in itself explain Facebook’s trajectory.
I-Banker incentives are complicated. On the one hand, potential clients select among them based on their ability to generate wealth for the client (pushing IPO prices up). On the other hand, they have tremendous opportunity for self-dealing transactions (pushing the IPO price down). The balance is apparently in flux.
Facebook may have been unusual because Zuckerberg’s particular special skills seem to resolve around analyzing and monetizing social interactions. Those skills may have helped him maneuver the I-bankers better than the average going-public entrepreneur.
In a couple years we’ll know whether the Facebook IPO was a trend or a blip in the pattern of IPOs. Blip supports the Zuckerberg-IPO-insights theory, while a larger trend suggests the opposite.