22
of
the shares on
signaling
theory. When
investors
are
uncertain
on
the
value of
the firm,
the greater
underpricing
will
attract
the uninformed
investors.
The
signaling
theory
proposes that
underpricing
will
signal
their
quality
of the
firms
to the investor. This
gap
for
the
underpricing
is
intended to compensate
the
loss
by
selling
the
shares
at
a
higher
price
in
the
future.
Another
factor
that
might
affect
the
market
performance
is investors’
overreaction
on the
shares
being
offered. Depending
on
the
time
when IPOs
are
offered, some investors are
overly
over
optimistic
about
the
potential
future
growth
of certain
industries
(Ritter, 1991). This over optimism will drive the demands for the offered
shares
to
increase
hence,
greater
initial
return
during
the
first
market-trading
day.
All
of these
factors
are
directly
related
to information
asymmetry.
Issuing
a
prospectus
from
potential
company,
and
also
their
choice
of
marketing
methods
in pricing
their
IPOs
can
reduce
information
asymmetry.
A prospectus
needs
to
include information
within their
companies
and
their
offers of
the
shares.
Minimum
requirement
of the
information
that needed
to be included
in a
prospectus
are, their
main
reason
to go public,
their company
structures
(board
of directors
and
commissioner),
offering
periods
and
important
dates
regarding
their offers, their appointed underwriters, a
summary
of
financial
report and the
industry
they are
operating
in (Kasmir,
1998).
Prospectus will be
distributed
to
potential
investors. Investors can
use
this
prospectus to
know
more about the company and hopefully
reduce
the information asymmetry
between investors and
issuers,
which
will
reduce
the
underpricing
of
the
shares.
Another
method
to reduce
information
asymmetry
is the
issuer’s
choice
of
marketing
method
in pricing their IPOs.
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