Abstract
The model in this paper provides a complementary explanation to the well-known IPO pricing puzzle. The model allows the investor to make a decision on whether and when information should be gathered, and allows a purchase decision based on the information. With this investor's decision-making process in mind, firms price their IPOs to maximize their payoffs by trying to avoid an IPO failure and by assessing the investor's possible post-search outcomes. While the model provides implications to the general IPO puzzle, the results seem particularly relevant for explaining the pricing of REIT IPOs, MLP IPOs, and mutual fund IPOs. The model may also help explain why IPO underpricing levels change over time and suggests that underpricing levels might vary across industries.