Question

Which of the following statement concerning IPO underpricing is correct?

		IPO underpricing refers to the difference between the underwriters' cost of buying shares in a firm commitment and the offering price of those shares to the public.
		IPO underpricing is a form of direct cost the issuer pays to raise new securities.
		IPO underpricing refers to the phenomenon that the closing price on the first day of trading is often lower than the initial offer price.
		Underpricing rewards institutional investors for the information they provide to underwriters regarding the potential interest in and value of a security issue.
		"Underpricing causes the issue of ""winner's curse""."

Answer 1

Initial public offer underpricing will reward the institutional investors for providing informations to the underwriters regarding potential interest in and value of a security issue because institutional investors are aware about the the value of a particular security and they induce the underwriter to value the shares lower, in order to gain maximum out of it on day of listing.

IPO underpricing is not about closing out on lower price than initial public offer or it is not the issue of winners curse so all other statement except statement (D) are false

Correct answer is option (D).