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Good Time for an IPO

Good Time for an IPO?

1) What is your opinion to the questions below?

A corporation usually decides to have an initial public offering (IPO) because it seeks to raise equity capital and create a public market so that large shareholders can eventually convert their wealth into cash. To maximize the amount of money raised, a corporation does not want to have its IPO during the wrong part of the smart market cycle. Thus, a corporation prefers to have an IPO during a bull stock market than during a bear stock market. Since there are various costs to a firm in going public, the firm should be sure that it actually wants to go public. These costs include the underwriting discount and underpricing. The Sarbanes-Oxley Act (SOX) has a greater impact on publicly-traded companies than private companies.


Eckbo, B.E. (2004, October 27). IPO underpricing: a survey. Retrieved from

Welch, I., & Ritter, J.R. (2002). A review of IPO activity, pricing and allocations. Retrieved from


Below are some questions for discussion.

1. What are three methods of issuing securities for cash? Compare and contrast these different methods.

2. What role do investment banks play in the IPO process?

3. Why does underpricing usually occur with IPOs?

You must answer one of the above questions. You do not need to answer all three questions. You must also respond to at least two peers' posts over two separate days. Please try to add information not previously discussed by others. Please provide factual information (not merely opinions) backed up by details or examples. Your comments should be in your own words and include references in APA format.

Solution Preview

1. What are three methods of issuing securities for cash? Compare and contrast these different methods.

-- The three methods that are used to issue securities for cash include the firm commitment method, the best efforts method and the Dutch auction method. In the firm commitment method, the company (or the company's representative) makes a deal with an underwriter of securities for a specified number of shares at a price slightly higher than what the share would sell for, on the open market. The underwriter then distributes the shares of stock.

In a best efforts method, the underwriters use exactly that - their best efforts. The shares are sold at a certain price but may actually be sold ...

Solution Summary

This solution discusses IPO's. The role of investment banks, underpricing, and the methods used to issue securities for cash are thoroughly discussed.