ABSTRACT
This chapter examines the alternative explanations of under pricing and reviews existing empirical evidence relating to the pricing of unseasoned common stock offerings. The most striking anomaly concerning the operation of new issue markets is the apparent under pricing of unseasoned common stock offerings. To ensure survival in such a competitive market the investment bank must balance the desires of issuers and investors—provided that exploitation of issuers' inexperience is detectable. The adverse selection model of the new issue market assumes that the issuer and the investment bank are uncertain about the share price which will be established in after market trading. Jay R. Ritter attempts to explain the hot issue market of 1980 as an equilibrium phenomenon caused by a stationary positive relationship between uncertainty and expected initial performance and a changing risk composition of initial public offerings. The chapter also presents an overview of the key concepts discussed in this book.
