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چکیده
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This paper reviews the reasons why Initial Public Offerings are underpriceed and the underpricing factors. IPOs on an average are underpriced. Underpricing is a universal phenomenon. Since it creates information momentum, which shifts the demand cover for the firm's stock outwards. Undrepricing is a costly signal for good firms to communicate their value, with the knowledge that only good firms have the opportunity to recoup the cost in secondary markets. Underpricing is basically a difference between the offer price and the listed price/ closing price. It happens because the capital markets are inefficient i.e., the price sensitive information is not available to all the players in the market at the same time. In fact, efficient market is a myth. Nowhere in the world do we come across a perfectly efficient market. Underpricing happens because of various reasons like regulatory mechanism, disclosure norms, concerns about poor response to IPO, Market psychology etc. It could also be, due to asymmetric information model, irrational behavior on the part of investors, or control considerations on the part of the managment. Underpricing occurs when the informed investors do not bid for the IPO and consequently the response is poor. It is necessary so as to attract the uninformed investors to the bid and then reveal the positive information. Sometimes, even informed investors are induced to disclose private information about the demand for shares. Thus it is an information extraction model. It is used as a tool to protect the dulution of control by the promoters and avoid any hostile takeover bid rival in the same the business. Wide distribution of shares will ensure a lower level of control. Behavioral finance theorists believe that underpricing is the result of irrational behavior on the part of investors or behavioral biases on the part of issuing companies.
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