Abstract
The model in this paper provides a complementary explanationto the well-known IPO pricing puzzle. The model allows theinvestor to make a decision on whether and when informationshould be gathered, and allows a purchase decision based on theinformation. With this investor's decision-making process inmind, firms price their IPOs to maximize their payoffs by tryingto avoid an IPO failure and by assessing the investor's possiblepost-search outcomes. While the model provides implications tothe general IPO puzzle, the results seem particularly relevant forexplaining the pricing of REIT IPOs, MLP IPOs, and mutualfund IPOs. The model may also help explain why IPOunderpricing levels change over time and suggests thatunderpricing levels might vary across industries.
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