Is Everyone Uninformed? A study of the relationship between profitability and IPO underpricing

Abstract: In this paper, we investigate the explanatory power of profitability on IPO underpricing through the lens of information asymmetry over different time paradigms. We find that although profitability does not have an impact on IPO underpricing in general, during the time paradigm of 2001 to 2010 it has a positive significant impact- highlighting the necessity to account for variations over time. This result is contrary to traditional information asymmetry theories and goes against past research findings. We propose to understand this result partly through the variation of informational value of accounting fundamentals in equity valuations over time and a potential mediating effect of news and marketing efforts by investment banks on uninformed investors' post-offering trading behaviour. We hypothesise that during the post-Dot-com bubble paradigm, investment banks were cautious to market firms with questionable financial track records. We propose future researchers to empirically investigate this hypothesis as an explanation of our results.