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چکیده
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The purpose of this paper is to review the asymmetric information theory as a factor affecting underpricing of initial public offerings (IPOs). The Key parties to an IPO transaction are the issuing firm, the underwriter/investment bank, marketing the deal and the new investors. Asymmetric information model assumes that one of these parties knows more than the others and that the resulting informational frictions give rise to underpricing in equilibrium and, creates uncertainty along the parties about value of firm, and this model includes: Winner’s Curse, Information Revelation, Principle-Agent, and Underpricing as a Signal of Firm Quality. The term “winner’s curse” is from the auction literature: it means the person who wins the auction may be cursed by learning that she overpaid. There are two type of investors in the market include; informed and uninformed investors. While uninformed investors subscribe to every IPO, informed investors only buy new shares if the issue price is less than the fair value. This causes “winner’s curse” for the uninformed investors. Therefore, shares must be offered at a discount to hold the uninformed investors in the market, it means that underpricing arises to compensate uninformed investors for the adverse selection problem they face, and solves the winner’s curse problem. Investors with bothersome information demand higher allocations of ‘hot’ IPOs, leaving less informed investors with larger allocations of ‘cold’ IPOs. Thus, underpricing is a necessary condition for both types of investors to participate in the new issue market in equilibrium. Adverse selection refers to a market process in which bad results occur when buyers and sellers have asymmetric information (i.e., access to different information): the bad products or customers are more likely to be selected. Underpricing the issue serves to compensate uninformed investors ex ante for the ‘adverse selection’ cost faced by them. However, underpricing has a major drawback- i
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