Abstract
We show that issuers use initial public offering (IPO) underpricing to signal their quality when the a priori information asymmetry is significant. Contrary to weak evidence in the signaling hypothesis from established markets, we find that in a less transparent emerging market firms strategically underprice their IPOs to issue seasoned equity at better terms.
Private firms that underpriced their primary listing in Poland between 2005 and 2009 were more likely to make follow-up seasoned equity offerings (SEOs) and their SEOs were larger and occurred sooner after the IPOs. This suggests that the economic incentives to follow the signaling strategy are stronger in opaque environments where high-quality issuers may underprice IPOs to overcome information asymmetry.