Pricing IPOs is a difficult task: the market is not certain about the quality of the
IPO firm, while the issuing firm and its underwriter do not know the market demand
for IPO shares. The disclosure of information is crucial in order to avoid mispricing.
The problem facing an underwriter wanting to collect information useful to pricing
an IPO is that investors have no reason to truthfully reveal their private information
during the premarket phase.
Benveniste and Spindt (1989) show that, in order to induce investors to truthfully
reveal their demand for IPO shares, they must be rewarded with more underpricing
on deals for ...
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