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Investors around the world are eager to buy shares of newly‐privatized state firms. This behavior is understandable in light of the evidence that many governments underprice initial public offerings. This paper looks at Eastern Europe's first public offerings of privatized state firms (in Poland) and finds evidence of significant underpricing. We also find that the level of underpricing was masked by special discounts and the redemption, at par, of discounted government bonds. Using conservative assumptions we conclude that underpricing was almost 30%, three times the level reflected by recorded stock prices. Our study of the new Polish stock market indicates the need for caution when using data from developing capital markets. Prices, returns, trends and market capitalization rates in Poland were affected by unique, local financial practices.