Why are IPOs Underpriced? An Empirical Test of an Economic Explanation

This paper tests several theories regarding the causes of underpricing. The researchers employ the number of IPOs in a given SIC code and time window as a proxy for the amount of market information that exists for a firm conducting an initial public offering. They find that information asymmetries play a critical role in determining the amount of underpricing. In addition, they confirm the importance of the dynamic equilibrium level of underpricing that result from the two-sided market role underwriters perform. The researchers do not find that hot or cold IPO markets affect the level of underpricing.