Under-pricing of IPOs:

IPO underpricing arises as a consequence of asymmetric information and rationing. The value of the new shares offered is uncertain. A group of investors, the informed, have perfect knowledge about the realized value of the offering.  All other investors, including the issuing firm and the underwriter, are uninformed; they can only form an expectation about the distribution of the issue's value. In this setting, new shares cannot be priced at their expected value. Informed investors crowd out the uninformed when the offering price is set below its true value; similarly, the informed withdraw from the market when the issue is overpriced. Uninformed investors are not allocated any underpriced issues given the rationing imposed by informed demand, but receive all the overpriced offerings. The uninformed then abstain from participating in the new issues market unless the issuing firm prices the shares at a discount.