Question

In the context of IPOs, what is underpricing?

a) Underpricing refers to firms’ tendency to conduct an IPO when they are undervalued by investors.

b) Firms tend to conduct an IPO during ‘cold’ periods with few IPOs and this causes underpricing.

c) Underpricing refers to the circumstance that on average the initial return from the offer price to the first closing market price is positive.

d) Underpricing refers to newly-listed firms’ tendency to be undervalued on the market in the first few years after their IPOs

Answer 1

c is correct

Underpricing refers to the IPO being issued at a price lower than the expected price. The company issues the IPO at a lower price in the market.When the market opens, the share prices increase and this causes the initial return from the offer price to be positive.

a ia false as the share is issued at a lower price by the company and not undervalued by investors. B is false since the companydeliberately prices the shares lower to attract more investors. D is false since with reference to IPOs the low prices are set only initially and not for the latter years.