Survey_Draus_2

Abstract

The game is organized in six stages. Time is not discounted. There is a firm initiallyentirely owned by a private financier (a venture capitalist for example) who is called “the owner” in what follows. The owner sells a fraction of his shares to two large outside investors by listing the firm on a stock exchange. At a later period, these investors can be hit by a liquidity shock or observe private information about the firm. They can trade their shares on the stock exchange or on an alternative trading platform. Trading is intermediated by competitive market makers. All agents are risk neutral except the owner and the market makers who are risk averse. The timing of the model is illustrated in figure 1. In the two first stages, the exchange determines its listing and trading conditions. First, it sets a level of listing requirements. This decision is considered as a long term decision since it implies the setting up of particular listing procedures as well as of specialized departments to enforce these requirements. Second, the exchange sets the trading fee. This decision is considered as short term decisions since fees can be changed quickly. At the third stage, the owner of the firm determines how many shares to sell to the outside investors. At this stage, the future cash flows of the firm are unknown to all agents. At the fourth stage, the firm learns the value of future cash flows. To comply with listing requirements the firm releases a noisy signal about its value. At the fifth date, one of both investors might be hit by a liquidity shock and might sell his entire holding. The other investor might observe perfectly the value of the future cash flows of the firm and might trade to exploit this information. Finally payoffs are realized. The equilibrium concept is sub-game perfection. The model is solved by backward induction.