The implications of IPO underpricing for the firm and insiders: Tests of asymmetric information theories

We assess the relative importance of various theoretical explanations of IPO underpricing by focusing on models that assume that the IPO is the first stage of a multi-stage selling scenario in an asymmetric information framework. In a two-period sell-out strategy, we find that firms are worse off due to IPO underpricing but insiders appear to maximize their wealth. The results indicate that the most compelling explanation for IPO underpricing is the entrepreneurial losses model. We also find strong support for the information momentum model and limited support for the information production, market feedback, and changing objective function models. The signaling explanation has the least support.