We develop a unified model of the issuer's decisions that takes into account both mechanism design and adverse selection risk. The model enables us to determine the optimal amount of information gathering prior to setting the offer price, and to understand what does and does not cause underpricing. The flexibility to allocate securities between a pool of investors who provide pricingrelevant information and investors who do not provide information is key to controlling underpricing. Policies that guarantee a minimum allocation to investors in the pool result in underpricing; policies that cap the allocations to such investors do not. The optimal number of investors in the pool, and thus the amount of information acquired, generally increases with the riskiness of the issue. However, this relation breaks down if pool members are guaranteed minimum allocations.

We compare the growth and responsiveness to demand shocks of post-initial public offering (IPO) firms and their private counterparts. Using multiple measures of myopia and multiple ways to match IPO firms with private firms, we do not find evidence of myopic behavior by public firms. IPO firms respond more to investment opportunities and have higher productivity in their early public years. Our results on public firms’ sensitivity to growth opportunities hold under several robustness tests, including when we consider firms’ total growth including acquisitions. The results show the importance of matching public to private firms early in their life.

This paper analyzes the relationship between a firm's capital structure and its information acquisition prior to capital budgeting decisions. It is found that low-growth industries can sustain a large number of levered firms. In these industries, leverage is negatively related to a firm's incentive to acquire information during the capital budgeting process. In contrast, high-growth industries only sustain a small number of levered firms. In these industries, levered firms acquire more information than all-equity financed firms. The model yields empirical predictions regarding the effects of leverage on the expected amount and the volatility of corporate investment.While leverage does not affect firm value, highly levered firms generate a more volatile cash flow than firms with low debt levels.