Asymmetric Information, Dynamic Information Production and Initial Public Offerings

This paper presents an information-theoretic model of IPO pricing in the presence of adverse selection and multiple trading periods. Initially investors produce information to reduce the information asymmetry and are compensated by the owner-manager. Some new investors enter and all investors engage in further information production in the subsequent periods as new information arrives to the market but the owner manager does not compensate any more. By incorporating future uncertainty and subsequent information revelation, the model is able to explain not only why firms going public are underpriced but also why, on average, they underperform in the long run. We use Linear Programming approach to obtain the optimal proportion of shares to be sold in subsequent periods and provide some numerical examples