18
the
investing
public.
The
disadvantage
of
course
will
be
an
additional
ongoing
cost
that
will
be
incurred
upon
the
firm.
In
the
process
of
going
public,
it
will
be
up
to
the
company
and
the
appointed
underwriter
in
determining
how
many
shares
and
at
what
price
it
will
be
offered.
The
value
of the
shares
after
it
is
publicly
listed
will
be
driven
by the
market
mechanism.
If during
the
initial
market-trading
day,
the
IPO
offering price
is
lower
than
the
initial
market
price,
this will be known as underpricing.
Underpricing
of
initial
public
offerings
has
been
researched
and
documented
in
many
studies.
In
the
United
States
of America
new
issues
market,
Ibbotson
(1975),
Ritter
(1984)
and Welch
(1989)
have
provided
some
evidence
in
underpricing
with average
initial return
of 22%. Dimson
(1979),
Buckland
et al
(1981)
and
Bank
of
England
(1986)
stated
that
the
underpricing
phenomenon
does
not restrict
itself
in the
United
States
market,
since
the
London
Stock
Exchange
Market
also
reported
an average
of
initial
return
from
8.5%
to
17%
(Levis, 1990).
There are many different
reasons why an IPO will be underpriced. Some of the
major
and
underlying
reasons
lie
in
asymmetric
information
theory,
signaling
theory
and
overreaction
of
investors.
Asymmetric
information
theory
is
just
one
of
the many
theories
that
attempts
to explain
why
there
are
differences
between
the
offering
prices
of the
IPO
and
actual
ending
price
on
the
initial
market-trading
day.
This
theory
explains
that the quality
and
amount
of
information
released
by
the
managers
(of
the
company)
and
that
of outside
investors are
not
the
same. In
addition
of
this
asymmetric
information,
the
action
that
was
taken
by
the
managers
in
valuing
a
firm,
can
also
affect
the
value
of
the
share.
The
best-known
asymmetric
information
model
is
Rock’s
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