Overpricing of instruments can result in lower demand, making it difficult to sell them. This can lead to a loss of potential revenue and market share. Underpricing, on the other hand, may suggest lower quality or devalue the instrument, impacting profitability and brand reputation. It is important for pricing to reflect the instrument's value to avoid these negative implications.
Underpricing occurs when additional shares are to be issued for companies with securities already publicly traded, to aid in the market's reception of the securities, and in large secondary offerings.
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Josef A. Schuster has written: 'Underpricing and crisis - IPO performance in Germany'
Underpricing is not a great concern with bond offerings because the pricing of bonds is typically more objective and transparent compared to the pricing of stocks. Bond prices are determined by market forces such as interest rates and credit risk, which are easier to evaluate. Additionally, underpricing bonds can lead to lower borrowing costs for issuers, which can be beneficial for them.
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This is not always an intentional strategy. They often do not know the value of the stock until it is made public and in the stock market for awhile.
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Underpricing is one major expense associated with issuing new shares of common stock.
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Philipp S. Hoegg has written: 'IPO underpricing, size effects, the greenshoe and positive conditioning' -- subject(s): Going public (Securities)