A Model of Informed Intermediation in the Market for Going Public

Jonathan Cohn, Aydogan Alti - Nov 01, 2022

We present a model in which informed experts intermediate in the market for going public by acquiring private firms and reselling their shares to public investors. Because information incorporated by the public market generates resale pricing risk for experts, the acquisition prices they pay act as credible signals of firm value. Accordingly, intermediated sales provide a superior alternative for firms that expect to be undervalued in traditional IPOs. We characterize how signaling via the acquisition price affects the sharing of the surplus between the experts and the selling firms. We also analyze the co-existence of intermediated sales and IPOs and the efficiency of the resulting market equilibrium. Our analysis of intermediated sales helps rationalize several design features of Special Purpose Acquisition Companies (SPACs).


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adverse selection SPACs signaling