So here is the dark side of the IPO world. Because the IB gets a 7% commission based upon the offer price, they want to keep the price sort of high and they have really done their quantity/price trade of homework.
Seven percent of a reduced price where lots of shares are placed is a lot more than 7% of a few high-priced shares. So they i gure "let’s shit the benefits from WeB-Genes to the subscribers". They reason: "We will pitch the price on the low side and that will stimulate the demand for placements of WeB-Genes; we make outfine and the subscribers are happy".
Happy is an important y variable in the IB’s loyalty equation. So this keeps lots of potential clients, who are bargain hunters at heart, in their book. Who suffers? WeB-Genes because they get less capital than they could have if the of er had been priced at or near the equilibrium price per share. Is underpricing the norm? From 1975 to 2005, IPO stocks have been underpriced on average in every year except 1975.
So why does underpricing seem to be the "economic" pricing rule? Let us look more closely at WeB-Genes. They were started by a microbiologist, a geneticist, and a rocket scientist: combined business savvy— the null set. They are delighted to secure the financing.
WeB-Genes may go along with underpricing because they will sum the wealth loss due to underpricing of the sold shares with the larger wealth gain on the retained shares due to the subsequent price increase.
From an economic perspective, this assumes that WeB-Genes has shares to issue/reissue, and that the price jump combines with the shares that could be issued so that they make up, in NPV terms, the sum for gone.
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| Underpricing |
