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PDF Working Paper Series If a company chooses an IPO as an exit strategy instead of being acquired by another company, it maintains its corporate name and status. IPO is a means of raising capital for companies by allowing them to trade their shares on the stock exchange. But investors with a high-risk appetite will still buy if the stock is underpriced. By the 1900s, 9.15% of IPOs were priced below market value. It can takea year or moreto prepare for an IPO. Going publican initial public offering of stockcan be an effective means of raising cash for corporate ventures. Thus, corporations reduce uninformed investors riskby selling underpriced stocks. 107 0 obj 0000001919 00000 n Moreover, the IPO will enable the generation of capital from a broad segment of the public sector and an opportunity to disseminate information on the business. Let us apply the given values to the formula: Thus, LinkedIn stocks were underpriced by 109%. In general, the offering price appears to be too low, but the first-day run up in generally too high.(Brigham and Daves pg 637). The size of the current and near-future market for the product or service that the company produces is considered. Another hard decision is if the investment that was made goes bad can you get out of this obligation. This scenario can also signal the end of short-term declines and the beginning of an upward rally. A knowledge center for investors and potential sellers addressing the complexities of special-purpose acquisition company mergers. Underpricing in IPO - Meaning, Reasons, Examples, Formula When a new stock closes its first day of trading above the set IPO price, the stock is considered to have been underpriced. The companys management and Board of Directors may be required to report stock holdings and sales and purchase transactions in registration statements and other Securities and Exchange Commission regulatory form filings if they meet SEC threshold disclosure requirements. Bylaws, other legal agreements, and financial statements must be cleaned up and audited. Another advantage is an increased public awareness of the company because IPOs often generate publicity by making their products known to a new group of potential customers. Asingle, disgruntled shareholderbringing a suit cancause expensive and time-consuming trouble for a publicly-traded firm. 0 You can find out more about our use, change your default settings, and withdraw your consent at any time with effect for the future by visiting Cookies Settings, which can also be found in the footer of the site. u n i . Advantages and disadvantages of going public and becoming - SlideShare