Information Asymmetry And Ipo Underpricing Hypothesis

Information asymmetry and ipo underpricing hypothesis

Corporate Finance- IPO and Underpricing (XiaoPing Li)

Information Asymmetry is usually assumed in most explanations of the underpricing of initial public offerings (IPOs). In Baron's (1982) model, the underwriter is better informed than the issuing firm concerning the demand for the IPO.

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The greater uncertainty associated with the demand will lead to a greater underpricing due to the enhanced value of the underwriter's expertise. In the case that the issuer is also an informed investment banker, Baron's hypothesis predicts no underpricing.

Information asymmetry and ipo underpricing hypothesis

Our results based on Canadian investment bankers do not support Baron's hypothesis.