Information Asymmetry in Financial Markets: A Theoretical Review of Its Impact on IPO Underpricing

Authors

  • Ziqi Lu

DOI:

https://doi.org/10.54097/gwd4c047

Keywords:

Information asymmetry, IPO underpricing, the market of lemons, herding effect

Abstract

Recent trends have highlighted a significant prevalence of IPO underpricing. The primary focus of this study will be on the influence of information asymmetry on IPO underpricing within the financial market, followed by an analysis of the causes and consequences of this trend. Firstly, it briefly introduces the overview of information asymmetry and links to its importance within the IPO market. Then, it reviews two important concepts from existing literature regarding information asymmetry and IPO underpricing: the market of “lemons” and the herding effect. However, the study does not merely dwell on illustrating these two concepts; it also critically evaluates their limitations while also addresses the pros and cons of IPO underpricing caused by information asymmetry. Finally, it offers potential solutions for the information asymmetry problem to lessen IPO underpricing. The findings and significance of this research are particularly significant for financial market participants and decision-makers, as they help to better address and manage concerns with information asymmetry in financial markets. Through this multi-faceted exploration, the paper aims to unravel avenues that foster transparency, equitable valuation, and sustainable long-term development within the IPO market.

Downloads

Download data is not yet available.

References

Leland H E, Pyle D H. Informational Asymmetries, Financial Structure, and Financial Intermediation. The Journal of Finance, 1977, 32 (2): 371-387.

Banerjee S, Dai L, Shrestha K. Cross-country IPOs: what explains differences in underpricing? Journal of Corporate Finance, 2011, 17 (5): 1289-1305.

Katti S, Phani B V. Underpricing of initial public offerings: A literature review. Universal Journal of Accounting and Finance, 2016, 4 (2): 35-52.

Akerlof G A. The Market for 'Lemons': Quality Uncertainty and the Market Mechanism. Quarterly Journal of Economics, 1970, 84 (3): 488-500.

Banerjee A V. A simple model of herd behavior. The Quarterly Journal of Economics, 1992, 107 (3): 797-817.

Yang C, Hu S, Xia B. The endogenous dynamics of financial markets: Interaction and information dissemination. Physica A: Statistical Mechanics and its Applications, 2012, 391 (12): 3513-3525.

Shleifer A, Summers L H. The noise trader approach to finance. Journal of Economic Perspectives, 1990, 4 (2): 19-33.

Ravi R, Hong Y. Firm opacity and financial market information asymmetry. Journal of Empirical Finance, 2014, 25: 83-94.

Perera W. Why Do IPOs leave money on the table for investors on the first day of trading? A theoretical review. A Theoretical Review (February 22, 2015).

Klausner M, Ohlrogge M, Ruan E. A sober look at SPACs. Yale Journal on Regulation, 2022, 39: 228.

Downloads

Published

22-01-2024

How to Cite

Lu, Z. (2024). Information Asymmetry in Financial Markets: A Theoretical Review of Its Impact on IPO Underpricing. Highlights in Business, Economics and Management, 24, 664-669. https://doi.org/10.54097/gwd4c047