Firms underprice new issues of common stock for the following reason(s).
A. When the market is in equilibrium, additional demand for shares can be achieved only at a lower price.
B. When additional shares are issued, each share’s percent of ownership in the firm is diluted, thereby justifying a lower share value.
C. Many investors view the issuance of additional shares as a signal that management is using common stock equity financing because it believes that the shares are currently overpriced.
D. All of the above.
Answer:D
Firms underprice new issues of common stock for the following reason(s).
A. When the market is in equilibrium, additional demand for shares can be achieved only at a lower price. B. When additional shares are issued, each share’s percent of ownership in the firm is diluted, thereby justifying a lower share value. C. Many investors view the issuance of additional shares as a signal that management is using common stock equity financing because it believes that the shares are currently overpriced. D. All of the above.