The most striking result from these comparisons was the absence of any overpriced IPOs in hot markets--i.e., of the 721 IPOs that went public in times classified by the Ibbotson and Jaffe method as hot, all were underpriced
. This contrasts with the underpriced
sample which was almost evenly split between hot and cold markets (44% in hot and 56% in cold).
The firm knowingly agrees to be underpriced
in order to give the investment banker the appropriate incentive to make the optimal distribution of its securities.
In the context of IPOs, Welch's arguments suggest that an issue may be underpriced
in order to induce decisions by early investors solicited to purchase a forthcoming IPO.
Thus, whether the IPO is underpriced
or not on the offer day is inconsequential to aftermarket investors' ability to sue or recover damages.
Are anchor investors given disproportionate allocations in substantially underpriced
"Are IPOs Really Underpriced
?," The Review of Financial Studies 17(3): 811-848.
But when market confidence is low and uncertainties abound, IPOs tend to be underpriced
. Informed investors, who take up most of the allocation during this period, get discounts for taking additional risks.
Why new issues are underpriced
. Journal of Financial Economics, 15, 187-212.
Moreover, large IPOs tend to be less underpriced
than smaller offerings.
Recent polls have shown rising support for the country's Labour Party against Prime Minister Theresa May's Conservative party, with a Labour victory underpriced
by markets, much like the Brexit vote was.
In such a situation, the new shareholders will require the issue to be underpriced
to compensate them for these potential costs.
When companies go public, the shares that are sold tend to be underpriced
, in that the share price jumps on the first day of trading.