Explain role of market efficiency in underpricing theories

Reference no: EM1343718

One method utilized by companies to obtain the long-term capital necessary to run and grow their businesses is by providing the general public with the option to purchase stocks. The company's first sale of stock is known as the initial public offering (IPO). When a company first offers the IPO, stocks are, on average, underpriced.

QUESTIONS:

1. Discuss the implications of such underpricing to established theories of market efficiency.

2. Explain the role market efficiency might play in the underpricing theories presented by Loughran and Ritter.

Reference no: EM1343718

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