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Discuss three plausible reasons for underpricing in an IPO.

Discuss three plausible reasons for underpricing in an IPO.

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Answer #1

Three plausible reasons for underpricing in initial public offering are as follows-

A. It could be attributed to underwriter perverse motives- sometimes underwriters will be wanting to value the share at lower prices and want to gain from lower prices.

B. Investors compensation for Risk- investors speculation in share is another reason for underwriting of initial public offering because when investors will be speculating into initial public offering he would be trying to get a compensation for his overall risk and that could result in to under pricing.

C.The Winner Curse problem- when you will be getting a larger proportion of initial public offer it can be leading to loss of money. Underpricing will help in reduce the problem of Winner curse.

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