Using a unique regulatory design from the Indian IPO setting, this paper decomposes traditional underpricing (offer-to-close return) into voluntary premarket and aftermarket mispricing. This separation allows us to test propositions from information asymmetry-based and behavioral theories that explain IPO underpricing. Our results show that underwriter reputation is significantly related to greater voluntary underpricing in the premarket. This relation is more pronounced for small firms, institutional oversubscription, and IPOs without discretionary allocation. Consistent with investor sentiment, oversubscription by retail investors and market momentum is positive and significantly related to initial returns in the aftermarket. Further, our results support that premarket transparency reduces the winner's curse for retail investors in the post-listing period. Overall, the findings suggest that information-based factors explain premarket voluntary underpricing, whereas, behavioral factors are significantly related to aftermarket mispricing. Our results are robust to endogeneity concerns.
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