In a typical IPO, a new venture floats its shares of stock through an underwriter. The underwriter offers the shares to a group of institutional investors and any leftover shares are sold on the market on the first day of trading. It is common for the IPO shares to suffer underpricing which is the difference between the offer price of the stock and its higher closing price on the first day of trading. Underpricing is enabled by information asymmetry; those who sell the shares know more than those who buy the shares. More importantly, this information asymmetry is exacerbated because the IPO process is a mediated market. Since the underwriter is a middle party to the ultimate exchange of shares, the information asymmetry facing underwriters affects the amount of underpricing. In this paper we identify when information asymmetry will be higher or lower for the underwriter and then we examine whether this has an impact on the amount of underpricing. More specifically, we hypothesize that when a new venture utilizes a greater proportion of technology from outside the industry, it will pose pricing difficulties for the underwriter. However, when an underwriter has more experience underwriting shares of companies from the same industry, this experience will reduce its information asymmetry for the underwriter and lead to lower underpricing.
Galloway, Tera; Miller, Douglas; Arthurs, Jonathan; Kim, Sang; and Cho, Sam Yul
"SOURCES OF INFORMATION ASYMMETRY AND UNDERPRICING IN INITIAL PUBLIC OFFERINGS (SUMMARY),"
Frontiers of Entrepreneurship Research: Vol. 31
, Article 6.
Available at: https://digitalknowledge.babson.edu/fer/vol31/iss2/6