Information externalities and the role of underwriters in primary equity markets

Finns that go public produce information that influences the production decisions of their rivals as well as their own production decisions. If information-product ion costs are borne primarily by pioneering firms, market failures can occur in which both pioneers and followers remain private and make ill-informed investment decisions. Solving this coordination problem requires a transfer between pioneers and followers that leads to a more equitable distribution of information-production costs. We contend that investment banks can enforce such a transfer by effectively bundling IPOs within an industry. This suggests. an explanation for clustering of IPOs, through time and within industries. (C) 2002 Elsevier Science (USA).