OWNERSHIP DISPERSION, COSTLY INFORMATION, AND IPO UNDERPRICING

We develop an explanation for IPO underpricing in which the issuer's d emand for ownership dispersion creates an incentive to underprice. Pro moting oversubscription allows broad initial ownership, which in turn increases secondary-market liquidity. Increased liquidity reduces the required return to investors. Broad initial ownership, however, requir es an increase in investor-borne information costs. These information costs are offset through initial underpricing. Empirical results are c onsistent with initial underpricing reflecting the level of ownership dispersion.