N°26-03: The Economics of Not Knowing: A Symmetric Ignorance Theory of IPO Pricing

We develop a unified framework in which IPO practices operate not to manage asymmetric information but to prevent it from arising. Costly information acquisition gives investors an option to pick and choose among offerings, forcing the underwriter to offer a discount. IPO practices lower the value of this option-by diminishing the quality, relevance, or payoff of investor information-and thereby reduce the discount required to deter information production. This information-prevention perspective offers a coherent explanation for otherwise disparate practices, resolves persistent empirical puzzles about IPO allocations, and yields new implications for cornerstone investors and the JOBS Act.