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IPO Pricing: Informational Inefficiency and Misallocation in Capital Market

Extant literature is not unequivocal about IPO pricing. It is almost silent about the misallocation in the capital market. IPO pricing is mostly argued from the point of view of listing gains/losses. This paper seeks to explain the process and outcomes of IPO pricing in the capital market with the help of a basic model. With the help of certain cases it attempts to show that asymmetric information and informational inefficiency lead to misallocation of capital, adverse selection costs and moral hazard costs.