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This theory is based on the premise that the issuing firm has more information than the investor. According to the lemons theory; only worse than average issuers are willing to sell their shares at the average price and high quality issuers will try to distinguish themselves from this large group of issuers by selling at a below market price. Purposely selling an underpriced security is also called, signaling. In theory this deters lower quality issuers from entering and the up front costs of underpricing can be recovered later through; future issuing activity, favorable market responses to future dividend announcements or through extra analyst coverage (Chemmanur 1993)...
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