Correct Valuation Leaves Money on the Table
According to economist Kevin Rock (Rock, 1986), because informed investors do not exist in sufficientnumber, underwriters re-price I.P.O offerings to bring in uninformed investors and ensure that theymaximize total bidding. This theory has empirical support in papers that have found that when investment banks can allocate shares in greater measure to informed investors, the underpricing is reduced since thecompensation needed to draw uninformed investors is lower. (Davidoff, 2011). Underpricing has also beenfound to be lower when information about the issuer is more freelyavailable so that uninformed investors are at less of a disadvantage.Underpricing gives uninformed investors normal return. In countrieswhere share allocation is transparent (Singapore and Finland),investors receive more shares of overpriced offerings making average profits zero. (Keloharju, 1993).