Determinants of IPO Pricing: A Review of Theories and Evidence
Research Article
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Determinants of IPO Pricing: A Review of Theories and Evidence

Hanxuan Zhu 1* Yike Liu 2, Chengcheng Yang 3
1 Nexus International School
2 University of Bristol
3 University of Leeds
*Corresponding author: danielzhu587030@gmail.com
Published on 16 September 2025
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AEMPS Vol.217
ISSN (Print): 2754-1177
ISSN (Online): 2754-1169
ISBN (Print): 978-1-80590-363-5
ISBN (Online): 978-1-80590-364-2
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Abstract

This literature review explores the role of information asymmetry in Initial Public Offering pricing, focusing on how companies impact their informational advantage over investors to underpricing shares. Information asymmetry creates an adverse selection problem, leading firms to underprice IPOs to attract institutional investors and reduce risks. Signaling theory suggests that underpricing can also signal a firm’s quality with high-quality firms absorbing short-term losses to gain long-term benefits. Empirical evidence, including studies by Jain and Kini (1994) and Rock (1986), demonstrate how underpricing compensates uninformed investors for higher risk. Additionally, the allocation process is influenced by market sentiment, firm size, and underwriter reputation, with institutional investors often receiving favorable allocations in high-demand IPOs, leading to better outcomes for them.

Keywords:

IPO pricing determinants, Information asymmetry, Market sentiment, Institutional allocation, Bookbuilding process

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Zhu,H.;Liu,Y.;Yang,C. (2025). Determinants of IPO Pricing: A Review of Theories and Evidence. Advances in Economics, Management and Political Sciences,217,84-91.

References

[1]. Stoll, H.R. and Curley, A.J. (2009). Small Business and the New Issues Market for Equities. The Journal of Financial and Quantitative Analysis, 5(3), p.309.doi: https: //www.cambridge.org/core/journals/journal-of- financial-and-quantitative-analysis/article/small-business-and-the-new-issues-market-for-equities/6FB64DA41CF0DA103D86ADE4318B0139

[2]. Lizińska, J. and Czapiewski, L. (2014) 'Performance of Polish IPO firms: Size and profitability effect, ' Gospodarka Narodowa, 269(1), pp. 53–71. https: //doi.org/10.33119/gn/100877.

[3]. Neupane, S. and Poshakwale, S.S. (2012). Transparency in IPO mechanism: Retail investors’ participation, IPO pricing and returns. Journal of Banking & Finance, 36(7), pp.2064–2076. Doi: https: //doi.org/10.1016/j.jbankfin. 2012.03.010.

[4]. Aggarwal, R., Prabhala, N.R. and Puri, M. (2002). Institutional Allocation in Initial Public Offerings: Empirical Evidence. The Journal of Finance, 57(3), pp.1421–1442. doi: https: //doi.org/10.1111/1540-6261.00465.

[5]. Benveniste, L.M. and Spindt, P.A. (1989). How investment bankers determine the offer price and allocation of new issues. Journal of Financial Economics, [online] 24(2), pp.343–361. doi: https: //doi.org/10.1016/0304-405x(89)90051-2.

[6]. Benveniste, L.M. and Wilhelm, W.J. (1990). A comparative analysis of IPO proceeds under alternative regulatory environments. Journal of Financial Economics, 28(1-2), pp.173–207. doi: https: //doi.org/10.1016/0304-405x(90)90052-2.

[7]. Sherman, A.E. and Titman, S. (2002). Building the IPO order book: underpricing and participation limits with costly information. Journal of Financial Economics, 65(1), pp.3–29. doi: https: //doi.org/10.1016/s0304-405x(02)00133-2.

[8]. Akerlof, G.A. (1970). The Market for ‘Lemons’: Quality Uncertainty and the Market Mechanism. The Quarterly Journal of Economics, [online] 84(3), pp.488–500. doi: https: //doi.org/10.2307/1879431.

[9]. Welch, I. (1991). An Empirical Examination of Models of Contract Choice in Initial Public Offerings. The Journal of Financial and Quantitative Analysis, 26(4), p.497. doi: https: //doi.org/10.2307/2331408.

[10]. WELCH, IVO. “Seasoned Offerings, Imitation Costs, and the Underpricing of Initial Public Offerings.” The Journal of Finance, vol. 44, no. 2, June 1989, pp. 421–449, https: //doi.org/10.1111/j.1540-6261.1989.tb05064.x.

[11]. Nanda, V. and Yun, Y. (1997). Reputation and Financial Intermediation: An Empirical Investigation of the Impact of IPO Mispricing on Underwriter Market Value. Journal of Financial Intermediation, 6(1), pp.39–63. doi: https: //doi.org/10.1006/jfin.1996.0208.

[12]. JAIN, B.A. and KINI, O. (1994). The Post-Issue Operating Performance of IPO Firms. The Journal of Finance, [online] 49(5), pp.1699–1726. doi: https: //doi.org/10.1111/j.1540-6261.1994.tb04778.x.

[13]. Rock, Kevin. “Why New Issues Are Underpriced.” Journal of Financial Economics, vol. 15, no. 1-2, Jan. 1986, pp. 187–212.

[14]. Ljungqvist, A., Nanda, V. and Singh, R. (2006) 'Hot markets, investor sentiment, and IPO pricing*, ' The Journal of Business, 79(4), pp. 1667–1702. https: //doi.org/10.1086/503644.

[15]. Chopra, N., Charles M. C. Lee, Shleifer, A., & Thaler, R. H. (1993). Yes, Discounts on Closed-End Funds Are a Sentiment Index. The Journal of Finance, 48(2), 801–808. https: //doi.org/10.2307/2328927

[16]. Reilly, F.K. (1973). Further Evidence on Short-Run Results for New Issue Investors. The Journal of Financial and Quantitative Analysis, 8(1), p.83. doi: https: //doi.org/10.2307/2329750.

[17]. Park, J. (2022). Investor Protection in an Age of Entrepreneurship’ (2022) 12(1) Harvard Business Law Review 107 MLA 9th ed. Park, James J. Harvard Business Law Review, 107(1), p.107.

[18]. Bubna, A. and Prabhala, N.R. (2011). IPOs with and without allocation discretion: Empirical evidence. Journal of Financial Intermediation, 20(4), pp.530–561. doi: https: //doi.org/10.1016/j.jfi.2010.12.004.

[19]. Sherman, A.E. (2000). IPOs and Long-Term Relationships: An Advantage of Book Building on JSTOR. [online] Jstor.org. Available at: https: //www.jstor.org/stable/2646000?saml_data=eyJzYW1sVG9rZW4iOiI2NjVl ODhlZS1lNzkyLTQzMWEtOTgyZi1kNzVmYzljYjhjMTciLCJlbWFpbCI6ImVlMjNjeUBsZWVkcy5hYy51ayIsImluc3RpdHV0aW9uSWRzIjpbImI5M2UwZWMwLTAwOTMtNGVmYy1iMzhlLTA4NmZiZGY1YTVkOCJdfQ& seq=2 [Accessed 1 Oct. 2024].

References

[1]. Stoll, H.R. and Curley, A.J. (2009). Small Business and the New Issues Market for Equities. The Journal of Financial and Quantitative Analysis, 5(3), p.309.doi: https: //www.cambridge.org/core/journals/journal-of- financial-and-quantitative-analysis/article/small-business-and-the-new-issues-market-for-equities/6FB64DA41CF0DA103D86ADE4318B0139

[2]. Lizińska, J. and Czapiewski, L. (2014) 'Performance of Polish IPO firms: Size and profitability effect, ' Gospodarka Narodowa, 269(1), pp. 53–71. https: //doi.org/10.33119/gn/100877.

[3]. Neupane, S. and Poshakwale, S.S. (2012). Transparency in IPO mechanism: Retail investors’ participation, IPO pricing and returns. Journal of Banking & Finance, 36(7), pp.2064–2076. Doi: https: //doi.org/10.1016/j.jbankfin. 2012.03.010.

[4]. Aggarwal, R., Prabhala, N.R. and Puri, M. (2002). Institutional Allocation in Initial Public Offerings: Empirical Evidence. The Journal of Finance, 57(3), pp.1421–1442. doi: https: //doi.org/10.1111/1540-6261.00465.

[5]. Benveniste, L.M. and Spindt, P.A. (1989). How investment bankers determine the offer price and allocation of new issues. Journal of Financial Economics, [online] 24(2), pp.343–361. doi: https: //doi.org/10.1016/0304-405x(89)90051-2.

[6]. Benveniste, L.M. and Wilhelm, W.J. (1990). A comparative analysis of IPO proceeds under alternative regulatory environments. Journal of Financial Economics, 28(1-2), pp.173–207. doi: https: //doi.org/10.1016/0304-405x(90)90052-2.

[7]. Sherman, A.E. and Titman, S. (2002). Building the IPO order book: underpricing and participation limits with costly information. Journal of Financial Economics, 65(1), pp.3–29. doi: https: //doi.org/10.1016/s0304-405x(02)00133-2.

[8]. Akerlof, G.A. (1970). The Market for ‘Lemons’: Quality Uncertainty and the Market Mechanism. The Quarterly Journal of Economics, [online] 84(3), pp.488–500. doi: https: //doi.org/10.2307/1879431.

[9]. Welch, I. (1991). An Empirical Examination of Models of Contract Choice in Initial Public Offerings. The Journal of Financial and Quantitative Analysis, 26(4), p.497. doi: https: //doi.org/10.2307/2331408.

[10]. WELCH, IVO. “Seasoned Offerings, Imitation Costs, and the Underpricing of Initial Public Offerings.” The Journal of Finance, vol. 44, no. 2, June 1989, pp. 421–449, https: //doi.org/10.1111/j.1540-6261.1989.tb05064.x.

[11]. Nanda, V. and Yun, Y. (1997). Reputation and Financial Intermediation: An Empirical Investigation of the Impact of IPO Mispricing on Underwriter Market Value. Journal of Financial Intermediation, 6(1), pp.39–63. doi: https: //doi.org/10.1006/jfin.1996.0208.

[12]. JAIN, B.A. and KINI, O. (1994). The Post-Issue Operating Performance of IPO Firms. The Journal of Finance, [online] 49(5), pp.1699–1726. doi: https: //doi.org/10.1111/j.1540-6261.1994.tb04778.x.

[13]. Rock, Kevin. “Why New Issues Are Underpriced.” Journal of Financial Economics, vol. 15, no. 1-2, Jan. 1986, pp. 187–212.

[14]. Ljungqvist, A., Nanda, V. and Singh, R. (2006) 'Hot markets, investor sentiment, and IPO pricing*, ' The Journal of Business, 79(4), pp. 1667–1702. https: //doi.org/10.1086/503644.

[15]. Chopra, N., Charles M. C. Lee, Shleifer, A., & Thaler, R. H. (1993). Yes, Discounts on Closed-End Funds Are a Sentiment Index. The Journal of Finance, 48(2), 801–808. https: //doi.org/10.2307/2328927

[16]. Reilly, F.K. (1973). Further Evidence on Short-Run Results for New Issue Investors. The Journal of Financial and Quantitative Analysis, 8(1), p.83. doi: https: //doi.org/10.2307/2329750.

[17]. Park, J. (2022). Investor Protection in an Age of Entrepreneurship’ (2022) 12(1) Harvard Business Law Review 107 MLA 9th ed. Park, James J. Harvard Business Law Review, 107(1), p.107.

[18]. Bubna, A. and Prabhala, N.R. (2011). IPOs with and without allocation discretion: Empirical evidence. Journal of Financial Intermediation, 20(4), pp.530–561. doi: https: //doi.org/10.1016/j.jfi.2010.12.004.

[19]. Sherman, A.E. (2000). IPOs and Long-Term Relationships: An Advantage of Book Building on JSTOR. [online] Jstor.org. Available at: https: //www.jstor.org/stable/2646000?saml_data=eyJzYW1sVG9rZW4iOiI2NjVl ODhlZS1lNzkyLTQzMWEtOTgyZi1kNzVmYzljYjhjMTciLCJlbWFpbCI6ImVlMjNjeUBsZWVkcy5hYy51ayIsImluc3RpdHV0aW9uSWRzIjpbImI5M2UwZWMwLTAwOTMtNGVmYy1iMzhlLTA4NmZiZGY1YTVkOCJdfQ& seq=2 [Accessed 1 Oct. 2024].

Cite this article

Zhu,H.;Liu,Y.;Yang,C. (2025). Determinants of IPO Pricing: A Review of Theories and Evidence. Advances in Economics, Management and Political Sciences,217,84-91.

Data availability

The datasets used and/or analyzed during the current study will be available from the authors upon reasonable request.

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Volume title: Proceedings of the 4th International Conference on Financial Technology and Business Analysis

ISBN: 978-1-80590-363-5(Print) / 978-1-80590-364-2(Online)
Editor: Lukáš Vartiak
Conference website: https://2025.icftba.org/
Conference date: 12 December 2025
Series: Advances in Economics, Management and Political Sciences
Volume number: Vol.217
ISSN: 2754-1169(Print) / 2754-1177(Online)

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