IPOs are generally underpriced because:
A)informed investors will avoid overpriced stocks,thereby resulting in lower demand,which will also deter wary uninformed investors.
B)it is very difficult to set an offer price for a new company.
C)shares of new company are illiquid.
D)none of the given options.

Question

Quizplus · Accepted Answer

IPOs are generally underpriced because informed investors, who have access to more information and are better able to value the company, will avoid overpriced stocks. This reduces demand for the shares, which in turn deters less-wary uninformed investors from purchasing them. As a result, underpricing the shares can help generate demand among a wider range of investors and increase the likelihood of a successful IPO. Difficulty in setting an offer price and lack of liquidity for new shares may also be factors, but they are not the primary explanation for underpricing.

IPOs Are Generally Underpriced Because