Why is ipo under pricing a cost to the issuing firm

Assignment Help Financial Management

Reference no: EM132048619

Venture capitalists invest in private companies. However, not all private companies receive financing from VCs:

VC-financed firms are an extremely small percentage (0.1%) of all new firms created. Specifically, VCs usually invest in fast-growing companies such as Facebook, Twitter, Uber, etc.

Why VCs invest in this type of fast-growing companies?

Answer this question by utilizing the fact that

1) most VC funds have a fixed life of 10 years and

2) VCs need a mechanism to give money back to their investors (Limited partners).

Initial return is the return on the first day of trading. Specifically, initial return is defined as (closing market price of first trading day - offer price)/offer price. We say an IPO is underpriced if the initial return is positive.

Why is IPO under pricing a cost to the issuing firm? Provide your reasoning.

Reference no: EM132048619

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