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

Question

Quizplus · Accepted Answer

I. Underpricing helps mitigate the winner's curse, where investors who win the bid at an IPO might end up overpaying if the stock was priced accurately or aggressively.II. It acts as a reward for institutional investors, encouraging them to participate in the IPO process and share their valuation insights, which can be crucial for the pricing of the IPO.III. By underpricing, the risk that underwriters face in a firm commitment underwriting (where they agree to buy all unsold shares) is reduced, as lower prices can lead to higher demand and a lower likelihood of unsold shares.IV. Lower initial pricing can also reduce the likelihood of lawsuits from investors, as the potential for significant immediate losses is diminished, and the upside potential from underpriced shares can lead to greater satisfaction among investors.

Which of the Following Have Been Offered as Supporting Arguments