39. Which of the following have been offered as supporting arguments in favor of IPO underpricing?...

39. Which of the following have been offered as supporting arguments in favor of IPO underpricing? I. Underpricing counteracts the "winner's curse". II. Underpricing rewards institutional investors for sharing their opinions of a stock's market value. III. Underpricing diminishes the underwriting risk of a firm commitment underwriting. IV. Underpricing reduces the probability that investors will sue the underwriters. A. I and III only B. II and IV only C. I and II only D. I, II, and III only E. I, II, III, and IV

why choose E

Expert Solution

The correct answer is option E. I, II, III, and IV as all the above statements have been offered as supporting arguments in favor of IPO underpricing.

Explanation:

Underpricing counteracts the "winner's curse" because investors have different information about the fair price of the shares. The uninformed investors may buy shares at any price but informed investors buy only underpriced IPO.

Underpricing rewards institutional investors for sharing their opinions of a stock's market value. The retail investors get a signal about stock's market value through the institutional investor’s participation in IPO otherwise they will not participate in IPOs.

Underpricing diminishes the underwriting risk of a firm commitment underwriting. Underwriters agree to buy the securities from the corporation and resell them to other security dealers and to the public so they bear a lot of risk which get reduced to some extent by underpricing.

Underpricing reduces the probability that investors will sue the underwriters. There is litigation risk for underwriters for not fairly pricing the IPOs, therefore an IPO underpricing reduces that risk and probability that investors will sue the underwriters.

jeff jeffy answered 2 years ago

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