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[solution]: 9. IPO Underpricing In 1980, a certain assistant professor of finance bought 12 initial public...


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9.        IPO Underpricing   In 1980, a certain assistant professor of finance bought 12 initial public offerings of common stock. He held each of these for approxi- mately 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 ex- ploration companies. There were 22 of these offerings, and he submitted a purchase order for approximately $1,000 in stock for each of the companies. With 10 of these, no shares were allocated to this 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 per- cent above the offering price a month after the initial offering date. The assistant professor looked at his performance record and found that the $8,400 invested in the 12 companies had 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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