Underpricing

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Underpricing

Issuing securities at less than their market value.
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.

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.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved

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.
Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.
References in periodicals archive ?
Hence, the likeliness of subsequent issue is more for the firm that underprices. The signalling hypothesis has been tested and both supporting (Firth and Liau Tan (1997)) and contradicting (Michealy and Shaw (1994), Chi and Padgett (2005)) evidences have been reported.
(8) As no significant relation is found between ownership concentration and underpricing, we cannot support the opposite theory of Stoughton and Zechner (1998), who suggest that IPO firms underprice their stocks at issuance to create a more concentrated ownership structure.
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.
Beatty and Ritter (1986) suggest that in equilibrium, investment bankers should underprice any offerings they are participating in to maintain their reputation.
Recent research, however, suggests that the increasing importance of analyst coverage of IPOs may lead influential underwriters to underprice more severely (e.g., Beatty & Welch, 1996; Loughran & Bitter, 2002).
In his model, higher quality firms underprice IPO shares more heavily than do lower quality firms, but they recoup the underpricing costs in subsequent seasoned equity offerings (SEOs).
Its success will depend on two factors: One relates to the agreement with the price underwriter regarding the amount and type of stock to be offered, especially since there is strong evidence to suggest that investment bankers tend to underprice new offerings, possibly to provide their customers buying the stock a better "deal" (Petty, 1994, p.
The underwriter knows that it can underprice more (less) for a low-quality (high-quality) issuer given investors' lower (higher) demand for the issue.
A few examples include Brennan and Franks (1997), who suggest that insiders opportunistically underprice their IPO to discourage the formation of large, external blockholdings; Field and Karpoff (2002), who report that entrepreneurs often adopt anti-takeover measures prior to the IPO; and Smart and Zutter (2003), who find that a significant fraction of IPO firms employ dual-class capital structures.
The medical-malpractice line has suffered from escalating premiums and underwriting woes carried over from the soft market of the 1990s that saw many insurers underprice coverage.