ABSTRACT
The apparent under pricing of initial equity offerings was once considered prima facia evidence of the inefficiency of new issue markets. This chapter provides a direct test of the competitive equilibrium predicted by the adverse selection model by using a sample of issues conducted by the Offer for Sale in the UK. It introduces the sample used and examines some preliminary evidence on under pricing from the UK and discusses the equilibrium condition of zero expected returns for the uninformed. An implication of the adverse selection model of investor behaviour is that the expected return to the uninformed investor is zero. The estimate of the expected return for the uninformed is based on the fact that an equivalence, the expected value sense, can be drawn between the Offer for Sale method of rationing shares and that assumed in the formal modelling of the adverse selection bias. Stock Exchange regulations require information on the demand for each issue to be published.
