Underpricing

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Underpricing

Issuing securities at less than their market value.

Underpricing

Describing a situation in which a company prices an IPO lower than its market value. This results in the company raising less capital in the IPO than it could have raised. There is no definite way to determine if a stock issue is underpriced until it is too late and the price of the first secondary trade is much higher than the IPO.

underpricing

The pricing of a new security issue at less than the prevailing price of the same security in the secondary market. Underpricing helps ensure a successful sale.
References in periodicals archive ?
However, if investment bankers underprice to avoid legal responsibility in case an underwritten issue's performance results unsatisfactory, we would expect to see fewer short run cases of that nature.
Listing delay has a negative effect on underpricing, that is, the firms with larger time gap between offer and listing tend to underprice more; however a positive effect of listing delay on long-run performance suggests that firms with larger delay have better performance in the long-run.
In the previous section, it was suggested the existence of risky projects is necessary for the firms to go public and underprice the issue.
9) These theories suggest that governments deliberately underprice GOC IPOs to achieve political objectives such as wider stock ownership, support for the privatization program and increased probability of re-election.
4,5) The results are consistent with the notion that diversified firms underprice less than focused firms.
In response to a higher assessed threat, managers can underprice more at the margin in an attempt to reduce the post-IPO concentration of outside share ownership and the likelihood of an unwanted turnover in control.
This argument implies that low-quality firms do not underprice their IPOs as much as do high-quality firms, so investors correctly perceive underpricing as a signal of the firm's quality.
The reduction in spinning removed the incentive for issuers to choose investment bankers who underprice.
It is generally believed that a warrant's exercise price is tied to the offering price, reinforcing the underwriter's incentive to underprice when warrants are used.
Several reasons have been proposed to explain why a firm would willingly underprice its securities and limit the funds received.
However, Muscarella and Vetsuypens |19~ find evidence that investment bankers underprice stock in their own firms when going public.
Alexander's claim that small IPOs bear little litigation risk contradicts Tinic's |17~ rationale of why small firms underprice their IPOs more than larger firms.