Who ultimately controls the pricing of an IPO, and why does underpricing often occur during an IPO?
Tess asks:
Who ultimately controls the pricing of an IPO, and why does underpricing often occur during an IPO? What financial data is disclosed during the IPO process?
Who ultimately controls the pricing of an IPO, and why does underpricing often occur during an IPO? What financial data is disclosed during the IPO process?
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Whomever the underwriter is (Goldman Sachs, UBS, etc) controls the pricing. Their decision is usually based on market capitalization and earnings history. The reason IPOs tend to be underpriced/overpriced is because of different desired reactions in the marketplace. For example, sometimes and IPO can come out as an auction, such as the recent THI (Tim Horton’s) IPO. Everyone placed their best offer and the shares (15% of the company was being spun off by Wendy’s) were distributed based upon the highest offer and for their requested amount. In these situations, a lot of hype hits the IPO at open, but eventually dissapates after some time as seen in THI. A lot of times the price is simply offered at a discount to stir general interest among the public to try and buy the stock causing greater demand than supply and thus rising prices in the near future.