Question

From 1999 to 2017, the average IPO rose by 19.2% in its first day of trading. In 2000, 115 deals doubled in price on the first day. What factors might contribute to the huge 1st-day returns on IPOs? Some critics of the current IPO system claim that underwriters may knowingly underprice an issue. Why might they do this? Why might issuing companies accept lower IPO prices? What impact do institutional investors have on IPO pricing?

Answer 1

Ans:- (1) The important factors which might contribute huge returns on day1 of IPO is the buzz that is being created for a new issuer or new firms through different marketing strategies and it also depends on the underwriters and institutional investors. The underwriters intentionally lower the price to attract the buyers at an initial stage which can contribute to a huge return on day 1 for IPOs.

(2) yes, it is true that underwriters intentionally lower the price to attract investors because it is the best strategy to penetrate the market at an early stage. It will not be easy for young firms to sustain in the long run with so much competition and in return, it increases the profit of the underwriters.

(3) As discussed above it is not easy for young firms to attract the investors, therefore, they need to give them profit at a lower price thats why companies at an early stage lower their prices. The other advantage is it helps to raise the funds for the company at a quicker pace.

(4) Institutional Investors is one of the major factors for the firms during the IPOs issue. The pre-marketing strategies done by the institutional investors impact the pricing of the IPOs.Also, the institutional investors have a huge role in the IPO pricing because they play a major role in the demand of IPOs, therefore, they set a discount on the price to ensure success in the IPOs.Some times they buy the IPO-issued stock or guarantee a minimum price for the shares to sell.