Which of the following have been offered as explanations of IPO underpricing?
I.Underpricing helps offset the "winner's curse."
II.Underpricing helps ensure investors will be long-term holders of the IPO securities.
III.Underpricing helps ensure investment bank customers will earn a profit on average.
IV.Underpricing is needed to convince investors to accept the risks associated with IPOs.

Question

Quizplus · Accepted Answer

Underpricing helps ensure investors will be long-term holders because they initially feel they received a good deal, but it also helps investment bank customers earn a profit on average. It is also needed to convince investors to accept the risks associated with IPOs, as they may be hesitant to invest in a new, untested company. The winner's curse is a phenomenon where winning bidders in an IPO may have overpaid, but this is not a primary explanation for underpricing.

Which of the Following Have Been Offered as Explanations of IPO