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  • D.

    Evidence on Theories of IPO Underpricing

    • 1.

      Asymmetric Information I: Evidence on Theories Where Issuers Know More than Investors

Many theories suggest that IPO underpricing is a means of making payments to IPO purchasers to

counter problems caused by asymmetric information. Some theorize that issuers have more information

than outsiders and large payments to investors are required to provide incentives for them to acquire

costly information that overcomes the asymmetry (e.g., Chemmanur, 1993). Accuracy of our prediction

markets is evidence against such models. The information necessary to determine the value of the IPO

appears to have been in the hands of our traders and aggregated by our markets. Further, the traders

generated these accurate forecasts in exchange for very small profits. The mean profit in the market was

zero (by construction) and the most any trader earned was $241.

2. Asymmetric Information II: Evidence on Theories Where Investors Know More than


Other researchers theorize that outsiders have more information than issuers and that they require

large payments to reveal their information (e.g., Benveniste and Spindt, 1989). Accuracy of the

prediction markets could be consistent with the informational assumption of such models. However,

again, we obtained the information nearly costlessly in our prediction markets. Further, the evidence

from the demand estimates above suggests that Google also knew that the demand would have supported

a higher price. Thus, the overall evidence is against such models.

3. Asymmetric Information III: Evidence on Theories with Information Asymmetry across


The evidence is more consistent, though not entirely so, with asymmetric information across

investors. For example, Rock (1986) argues that uninformed investors will demand a high average initial


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