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Pricing an Initial Public Offering

Junk bonds garnered considerable public attention during the 1980s as some individuals gained significant wealth through investing in the bonds, but the market eventually fell into disfavor as scandal and corruption emerged. During the 1990s, the initial public offering (IPO) was responsible for making millionaires out of founders and employees of new companies, but the dot-com collapse in the early 2000s removed some of the luster from these investment vehicles, as well. This research considers the art of pricing an initial public offering, and whether IPOs are examples of market efficiency or whether the trend toward underpricing results in a lessthanoptimal system.

INITIAL PUBLIC OFFERINGS AND THE ROLE OF THE UNDERWRITER

Private companies have private sources of funding and do not make public financial disclosures as a course of business. Such companies tend to remain relatively small (United Parcel Service was one of the largest privately-held companies until it went public several years ago) since investors' capital has limited liquidity. Companies that sell public shares, however, provide their investors with considerable liquidity through the ability of investors to sell their shares to other members of the public in secondary markets such as the New York Stock Exchange.

There are two common ways in which a company can "go" public, both of which involve an underwriter. In the first, less common method, the underwriter works with the issuer to determine an offer price, and then the underwriter makes its best effort to sell the requisite number of shares at that price to raise the necessary capital. If all of the shares are not sold, the issue is withdrawn from the market and the company does not receive the capital. The underwriter has little risk in this case while the issuer bears considerable risk. In the second method, the underwriter guarantees a certain amount of capital to the company, and agr

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Pricing an Initial Public Offering. (1969, December 31). In LotsofEssays.com. Retrieved 04:32, March 29, 2024, from https://www.lotsofessays.com/viewpaper/1696387.html