Which of the following have been offered as justification for IPO underpricing?
I.Young firms tend to be very risky.
II.The best IPOs are oversubscribed.
III.Underwriters like to avoid lawsuits.
IV.It benefits the existing shareholders.

Question

Quizplus · Accepted Answer

I, II, and III have all been offered as justifications for IPO underpricing. Young firms are often considered risky investments, so underwriters may price the IPO lower to compensate for this perceived risk. The best IPOs are often oversubscribed, meaning there is more demand for shares than there are shares available, so underpricing can help manage this excess demand. Underwriters also want to minimize the risk of lawsuits, so they may underprice to minimize the chance of unhappy investors suing the company. Existing shareholders may benefit from underpricing if the stock price quickly rises after the IPO, increasing their wealth. However, option IV alone does not invalidate the rest of the choices, so the correct answer is A: I, II, and III only.

Which of the Following Have Been Offered as Justification for IPO