What is the most widely accepted model explaining IPO underpricing, and what is this model's main...
What is the most widely accepted model explaining IPO underpricing, and what is this model's main assumption?
Homework Answers
The most widely accepted model of IPO underpricing is that the firms or the banks selling the shares to the investor keep the share price low in order to encourage participation in the IPO and also ensure sufficient liquidity. Also, banks who underwrite the IPOs keep the share price low to ensure transactions as they earn commissions based on the number of transactions.
Thus the main assumption of the model is that investors are compensated for the illiquidity or the unpredictability by keeping the share price low in the IPO.
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