Two problems are well-known in IPO research as "IPO puzzles." First, an initial listing price is much higher than the offering price, or "underpricing." Second, the share price becomes much lower than the offering price in the long-term, or "long-term underperformance." Extensive research explains why these IPO puzzles coexist. Assuming that investors' opinions diverge, we conclude that even the offering price is distorted through strategic interaction between the entrepreneur and the underwriter. Specifically, the offering price is already "overpriced." Hence, the share price will substantially decrease as information asymmetry is mitigated, which delivers long-term underperformance. Our experiment supports these conclusions.
Yamamoto et al. (Fri,) studied this question.
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