Which is NOT a potential explanation for IPO short-term underpricing? Underwriters can unload more shares at a lower price. High returns on the first trading day attracts investors. Due to asymmetric information, firms need to lower price so outside investors are willing to invest. Firms want to raise more capital
Which is NOT a potential explanation for IPO short-term underpricing? Underwriters can unload more shares at a lower price. High returns on the first trading day attracts investors. Due to asymmetric information, firms need to lower price so outside investors are willing to invest. Firms want to raise more capital
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
Which is NOT a potential explanation for IPO short-term underpricing?
- Underwriters can unload more shares at a lower price.
- High returns on the first trading day attracts investors.
- Due to asymmetric information, firms need to lower price so outside investors are willing to invest.
- Firms want to raise more capital
Expert Solution
Introduction
Underpricing is the practice of listing an initial public offering (IPO) at a price below its real value in the stock market. When a new stock closes its first day of trading above the set IPO price, it is considered to have been underpriced.
Underpricing is short-lived because investor demand will drive the price upwards to its market value.
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