The underpricing of new shares of a firm that are offered to the public for the first time (initial offerings) is well known and has puzzled financial economists for a long time since it seems at odds with the optimal behavior of the owners of issuing firms. Past attempts by financial economists to explain this phenomenon have not been successful in the sense that the explanations given by them are either inconsistent with the equilibrium theory or implausible. Approaches by such authors as Welch or Allen and Faulhaber are no exceptions. In this paper, we develop a signalling model of capital investment to explain the underpricing phenomenon and also analyze the efficiency of investment. The model focuses on the information asymmetry between the owners of issuing firms and general investors. We consider a firm tha.t has been owned and operated by a single owner and that has a profitable project but has no capital to develop it. The profit from the project depends on the capital invested in the project as well as a profitability parameter. The model also assumes that the financial market is represented by a single investor who maximizes the expected wealth. The owner has superior information as to the value of the firm to investors in the sense that it knows the true value of the parameter while investors have only a probability distribution about the parameter. The owner offers the representative investor a -fraction of the ownership of the firm in return for a certain amount of investment in the firm. This offer condition is equivalent to the usual offer condition consisting of the number of issues to sell and the unit price of a share. Thus, the model is a signaling game. Using Kreps, criterion as the solution concept、we obtained an essentially unique. separating equilibrium offer condition. Analysis of this separating equilibrium shows that the owner of the firm with high profitability chooses an offer condition that raises an amount of capital that is short of the amount that maximizes the potential profit from the project. It also reveals that the fraction of the ownership of the firm that the representative investor receives from the owner of the highly profitable firm in return for its investment has a value that exceeds the investment. In other words、the initial offering in the model is underpriced when the profitability of the firm is high. The source of underpricing and underinvestment is the signaling activity by the owner of the highly profitable firm who attempts to convince investors that his firm has a highly profitable project by choosing an offer condition that cannot be imitated by the owner of a firm with low profitability. Thus、we obtained two main results. First, underpricing is a result of a signaling activity by the owner of a firm with high profitability when there exists information asymmetry between the owner of the issuing firm and investors. Second、such information asymmetry also leads to underinvestment in a highly profitable project. Those results clearly show the underpricing entails underinvestment and that information asymmetry leads to a social cost as well as a private cost. The above results are quite general in the sense that they are based upon a neoclassical profit function and full rationality of economic agents. We believe that the results of this paper can be used as a basis for further research on the capital investment Process. For instance, one can view the results of this paper as a subgame equilibrium ma larger game in which a firm chooses among diverse ways to raise capital. In addition、the method used in this paper can be used in analyzing a wide range of problems arising from information asymmetry that the Korean financial market faces