underprice

Hence, insurance players should not underprice a product if it bears a high loss ratio and places a heavy strain on its capital adequacy ratio [CAR].'

Under the condition of asymmetric information between issuers and investors, Beatty & Ritter, 1986 argue that the underwriters care about their reputation and therefore do not underprice their IPOs too much.

Issuers deliberately underprice in order to 'leave a good taste in investors' mouths'.

This favors them as they deliberately underprice IPOs.

In the words of Ibbotson (1975) who is credited with the original intuition for the IPO signaling literature, issuers underprice in order to "leave a good taste in investors' mouths".

They also argue that high-quality firms underprice their IPOs and generate publicity in order to reduce the uncertainty about the industry.

Smith studies 328 SEOs listed in the New York Stock Exchange (NYSE) and the American Stock Exchange (AMEX) from 1971 to 1975 and finds an average underprice of 0.54%.

It is also hypothesized that firms underprice IPOs to reduce the probability of lawsuit against it by investors (Tinic (1988), Hughes and Thakor (1992) and Ritter (2003)).

They also showed that "initial-day returns are higher for firms with outside dominated, high inside ownership boards" The importance of these results is the implication that that there may be an incentive for inside owners of IPO companies to underprice their stock.

If the reduction in incentives to monitor reduces audit quality, then underwriters may further underprice IPOs in the post-LLP period.