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IPO underpricing is the increase in stock value from the initial offering price to the first-day closing price. Many believe that underpriced IPOs leave money on the table for corporations, but some believe that underpricing is inevitable. Investors state that underpricing signals high interest to the market which increases the demand.
An initial public offering (IPO) or stock launch is a public offering in which shares of a company are sold to institutional investors [1] and usually also to retail (individual) investors. [2] An IPO is typically underwritten by one or more investment banks , who also arrange for the shares to be listed on one or more stock exchanges .
A public offering is the offering of securities of a company or a similar corporation to the public. Generally, the securities are to be publicly listed. In most jurisdictions, a public offering requires the issuing company to publish a prospectus detailing the terms and rights attached to the offered security, as well as information on the company itself and its finances.
Before a company has an initial public offering (IPO), it typically sets aside a handful of shares that are available for purchase. Since these shares tend to be offered in large quantities, pre ...
Music streamer Spotify is doing the latter in its move into the public stock market.
Underpricing can be explained by prospect theory, which suggests that investors tend to be more risk-averse when it comes to gains than losses. Hence, when a company offers its shares at a discount to their true value, it creates the perception of a gain for investors, which can increase demand for the shares and lead to a higher aftermarket price.
When a company wants to raise money, it plans on offering its stock to the public. This typically takes place through either an IPO or FPO. The book building process helps determine the value of the security. Once a company determines it wants to have an IPO, it will then contact a bookrunner or a lead manager.
The winner's curse is a phenomenon that may occur in common value auctions, where all bidders have the same value for an item but receive different private signals about this value and wherein the winner is the bidder with the most optimistic evaluation of the asset and therefore will tend to overestimate and overpay.