What is often a consequence of underpricing in an initial public offering?
Understand the Problem
The question is asking about the potential consequences of underpricing an initial public offering (IPO). It presents multiple-choice options, likely related to how underpricing can impact investors and the issuing firm.
Answer
Underpricing in an IPO often leads to larger demand, benefiting underwriters with higher commission fees and investors with substantial gains.
Underpricing in an initial public offering often results in larger demand for the shares, which increases the volume sold and leads to larger commission fees for the underwriting bank. It also benefits potential investors with substantial gains when the stock price increases on the first trading day.
Answer for screen readers
Underpricing in an initial public offering often results in larger demand for the shares, which increases the volume sold and leads to larger commission fees for the underwriting bank. It also benefits potential investors with substantial gains when the stock price increases on the first trading day.
More Information
Underpricing in IPOs is sometimes deliberate to boost demand, though it is typically costly for issuing companies as they raise less capital than potentially possible.
Tips
A common mistake when evaluating IPO underpricing is overlooking the short-term vs long-term impacts on both company valuation and investor returns. It's important to differentiate immediate gains for investors versus potential long-term costs to the issuing company.
Sources
- IPO Underpricing: Causes - ipohub.org
- Underpricing: Definition, How It Works, and Why It's Used - investopedia.com
