Question
1) IPO Underpricing. In 1980, a certain assistant professor of finance bought 12 initial public offerings of common stock. He held each of these for
1) IPO Underpricing. In 1980, a certain assistant professor of finance bought 12 initial public offerings of common stock. He held each of these for approximately one month and then sold. The investment rule he followed was to submit a purchase order for every firm commitment initial public offering of oil and gas exploration companies. There were 22 of these offerings, and he submitted a purchase order for approximately $1,000 in stock for each of these companies. With 10 of these, no shares were allocated to the assistant professor. With 5 of the 12 offerings that were purchased, fewer than the requested number of shares were allocated. The year 1980 was very good for oil and gas exploration company owners: On average, for the 22 companies that went public, the stocks were selling for 80 percent above the offering price a month after the initial offering date. The assistant professor looked at this performance record and found that the $8,400 invested in the 12 companies has grown to $10,000, representing a return of only about 20 percent (commissions were negligible). Did he have bad luck, or should he have expected to do worse than the average initial public offering investor? Explain.
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