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1.Why is it important that in an underwriting the investment banker does not overvalue (overprice) or...

1.Why is it important that in an underwriting the investment banker does not overvalue (overprice) or undervalue (underprice) the securities? If the securities are overpriced or underpriced, who suffers the loss?

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Answer #1

Suppose value of a issuer company share is $100. And, underwriter values stock at 95 and 105 in two scenarios. Then loss is:

Particulars Under Over
Stock price              100           100
Less: valuation               (95)          (105)
Under/ (over) valuation                  5              (5)
Loss suffered by Issuer Underwriter

If stock is undervalued then underwriter benefits but issuer suffers the loss.

If stock is overvalued then underwriter suffers the loss.

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