IPO underpricing continues to be a orbiculate phenomenon despite a vast amount of research that attempts to explain it. Theories based on teaching asymmetry suggest that high-quality issuers measuredly floor their IPOs to signal their quality to outside investors, hoping that it will be too costly for low-quality issuers to mimic. Underpricing also helps to overcome adverse survival of the fittest problems. Since uninformed investors tend to get a higher tryst of overpriced sh ares, they will stop participating in IPOs if issues are not, on average, underpriced. In the book-building framework, the theory of partial adjustment suggests that enthronement banks only partially adjust IPO offer prices up when they receive positive information about the value of the issue. They purposely leave money on the table to reward investors who truthfully reveal their information about the issue and threaten entrance fee to future deals for those that do not.
Some studies suggest that investment funds banks underprice IPOs to protect their reputation. When new issues are priced lower than they should be, investment bankers subject their legal liability by lowering the chance of price declines.
There is also evidence that greater underpricing leads to more aftermarket vocation volume, which increases the revenue of investment bankers when they subsequently become the market-makers for these IPO firms. enthronement bankers also benefit from underpricing because it allows them to curry favor with their clients in reciprocation for their loyalty and continued business. These explanations do not make it low-cal why subject firms approve underpricing as it only benefits the investment banks.
There are explanations of underpricing that are based on information production and ownership dispersion which will benefit the issuing firms. If issuing firms want to have a more sprinkle ownership, they need to underprice their IPOs so that more investors will be induced to produce...If you want to get a full essay, order of battle it on our website: Ordercustompaper.com
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