ABSTRACT
This chapter explores an alternative specification of the adverse selection model in which it is unnecessary to place restrictions on relative wealth to reach a description of the under pricing equilibrium. It presents the principal differences between the model and that developed by Kevin Rock arise from the simplification gained by assuming that investors and the issuer are risk neutral. The information structure is the most simple way of modelling the situation where some investors have privileged information about the issue relative to other investors. The chapter considers further developments of the adverse selection model. The critical aspect of the adverse selection model of the new issue market is the assumed information structure: the issuer's knowledge of share value, v, is limited to the probability density function f(v). The specification of the adverse selection model under risk neutrality assumptions produces the equilibrium condition of zero expected returns to uninformed investors.
