Tests of adverse selection models in the new issues market

Due to information asymmetry between various market participants, the new issues market is characterized by the classic adverse selection problem. Several theoretical models have suggested that high quality IPO firms resort to underpricing and staged financing to overcome the adverse selection problem. This paper provides a test of these adverse selection models by examining the link between IPO underpricing, staged financing and performance. Key words - initial public offerings, adverse selection, signaling, operating performance, information asymmetry