Asymmetric Information in the IPO Aftermarket

Using the adverse selection component of the spread as a measure of asymmetric information, we investigate how asymmetric information evolves after firms go public. We find that the level of asymmetric information is lower immediately after the initial public offering (IPO) compared with its level after a period of seasoning. In addition, we test the hypothesis that the greater the underpricing of an IPO, the more information is produced in its aftermarket, and the lower the aggregate level of asymmetric information. Our results are consistent with the hypothesis and are robust after controlling for other factors.