Many IPOs that are issued are underpriced. The main reason for
this under pricing are-
- Taking advantage of information asymmetry -
Usually investors do not research about a company before investing
in them. They just expect a good return and hence subscribe for an
IPO. To take advantage of this information asymmetry, and attract
these investors, the IPOs are underpriced.
- Underwriter's conflict - The
underwriter usually wants to keep the IPO underpriced so that he
does not have to buy the shares himself. Also, he gets his full
comission if all the shares are sold. Hence, the underwriter
usually tries to push the share price down.
Let me know in the comment section in case of any doubt.