Underpricing

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The term underpricing describes the phenomenon or the negative difference that arises when newly issued securities are offered at a lower price than the actual value would justify.

backgrounds

Underpricing for an IPO

In the case of an IPO, underpricing is the difference between the price paid by subscribers for newly issued securities ( issue price ) and the price at which the share or bond is first traded on the secondary market. For the securities subscriber, this difference represents an additional profit, while for the company the underpricing represents opportunity costs . The company could also have sold its shares at a higher price, thereby raising additional cash on its IPO . This phenomenon was first demonstrated in 1969 by an empirical study of initial equity issues (IPO) .

Empirically, a number of studies have shown that issues are issued too “cheaply”, as the issue price is often below the initial stock exchange price. So it is “ money left on the table ”. The reasons given are

  • a lower risk for the underwriters that they can sell all the shares
  • a " winner's curse " - this means incentives for uninformed investors to buy shares (since the value of the share usually rises on the first day of trading)

The best-known theoretical explanation for underpricing comes from Kevin Rock. The rock model assumes that underpricing is an equilibrium strategy of the issuers that takes into account the fact that investors are differently well informed about future business developments.

Underpricing for capital increases

The phenomenon of underpricing can also be observed with capital increases , especially with rights issues. As early as the 1960s it could be observed that some companies were offering young shares at an extremely low price as part of a rights issue and that the following dividend payments were kept at the same high level per share. This means that the shareholders - if they have exercised their subscription rights - all have more shares and thus receive more dividends. The bottom line here is the underpricing, in addition to achieving a high take-up ratio (acceptance rate for existing shareholders), as a hidden capital increase.

Achieving the high take-up ratio is promoted by the fact that the markets for subscription rights trading - if this has been set up at all - are often very illiquid and therefore it is very difficult to sell subscription rights. In addition, when the subscription rights are sold, profit is realized that is immediately taxable in many countries, which would negatively impact the shareholders' assets from the sale of subscription rights compared to the assumption.

literature

  • Adrian Hunger: IPO underpricing in the context of a vertical market segmentation , Duncker & Humblot, Berlin 2005, ISBN 3-428-11901-0
  • Adrian Hunger: IPO underpricing and the special features of the Neuer Markt. Lang-Verlag, Frankfurt 2001, ISBN 3-631-37805-X
  • Christian Tietze: Underpricing on the Neuer Markt. An empirical study for the period 1997–2002. Publishing house Dr. Kovač, Hamburg 2005, ISBN 3-8300-1761-8
  • Wallmeier, Martin / Rösl, Rainer (1999): Underpricing for the first issue of shares on the Neuer Markt (1997-1998) , in: Finanz Betrieb, Vol. 1, Vol. 7, pp. 134–142.

Web links

See also

Individual evidence

  1. ↑ Investorwords
  2. ↑ Reilly, Frank K .; Hatfield, Kenneth: Investor Experience with New Stock Issues. In: Financial Analysts Journal, Volume 25, 1969, pp. 73-80.
  3. ^ Rock, Kevin: Why New Issues are Underpriced. In: Journal of Financial Economics, Volume 15, 1986, pp. 187-212
  4. ^ Bernhard V. Falkenhausen and Ernst C. Steefel Shareholders: Rights in German Corporations (AG and GmBH), 1961, p. 421.