Facebooks IPO and Underpricing Essay

Open, View, and/or
Download this Document

Total Length: 983 words ( 3 double-spaced pages)

Total Sources: 3

Page 1 of 3

Stock Underpricing and Market Efficiency

Underpricing can and does occur for numerous reasons. It can act as a type of insurance on the part of the underwriter, as when a stock is overpriced at its IPO, legal suits may follow: investors who end up holding heavily overpriced issues may well have an incentive to sue the underwriter and/or the company directors for publishing misleading or incomplete information in the prospectus (Saudners, 1990, p. 7). There is also the theory that underpricing is a way to compete in the IPO market, where “some investors are viewed as informed while a larger group is viewed as uninformed” (Saunders, 1990, p. 7). Other explanations include uncertainty about liquidity and/or demand: underpricing is a way to hedge against this uncertainty—i.e., better to be safe (and leave a little money on the table) than sorry (and overprice). This paper will examine the uses of underpicing, its impact on organizations, and why underwriters might adopt it as a strategy.

Underpricing can be seen as a strategy in a competitive market; and it can also be seen as a way to safeguard oneself (if one is an underwriter). However, market efficiency in today’s day and age, where markets are impacted by unconventional monetary policy on the part of central governments, is not quite what it used to be. With central banks acting as “a significant buyer of assets” underwriters might be more inclined to reconsider the likelihood of demand for the IPO when they price the underlying (Joyce, Lasaosa, Stevens & Tong, 2011).

Stuck Writing Your "Facebooks IPO and Underpricing" Essay?

View All Our Example Facebooks IPO and Underpricing Essay

Have A Custom Example Essay Written



The implications of stock underpricing on an organization’s IPO may affect the short-term outlook (in that the initial issue takes in less than it otherwise might have had it been priced to reflect the demand manifested in the secondary market). However, if the demand is kept up, the organization could follow the IPO with another offering at a later point in the future. Few organizations are going to complain that their stock is too high in value: that value can always be leveraged in a number of ways to benefit the company and strengthen its operations. The IPO is but one step in the process of building a company’s future and underpricing certainly has much more appeal than overpricing. A stock that is overpriced and tanks upon its IPO may not ever recover. One can compare IPO’s if one likes: Twitter and Facebook, for example, serve as good illustrations of IPOs that are overpriced and underpriced. Twitter’s initial offering was at $26. It dipped and soared and dipped and soared again as investors struggled to find its real value in the months following the IPO. Finally it fell below its IPO price and today remains under $20. Facebook on….....

Show More ⇣

     Open the full completed essay and source list


OR

     Order a one-of-a-kind custom essay on this topic


sample essay writing service

Cite This Resource:

Latest APA Format (6th edition)

Copy Reference
"Facebooks IPO And Underpricing" (2017, October 07) Retrieved July 5, 2025, from
https://www.aceyourpaper.com/essays/facebooks-ipo-underpricing-2166131

Latest MLA Format (8th edition)

Copy Reference
"Facebooks IPO And Underpricing" 07 October 2017. Web.5 July. 2025. <
https://www.aceyourpaper.com/essays/facebooks-ipo-underpricing-2166131>

Latest Chicago Format (16th edition)

Copy Reference
"Facebooks IPO And Underpricing", 07 October 2017, Accessed.5 July. 2025,
https://www.aceyourpaper.com/essays/facebooks-ipo-underpricing-2166131
   

Open, View, and/or
Download this Document
order custom essay example