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

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.