In the UK, initial public offerings of common stock are usually sold by an offer for sale. Mr. Beam has observed that on average these stocks are under-priced by about 9% and for some years has followed a policy of applying for a constant proportion of each issue. He is therefore disappointed and puzzled to find that this policy has not resulted in a profit. Explain to him why this is so.© BrainMass Inc. brainmass.com March 4, 2021, 6:24 pm ad1c9bdddf
The principle that has been illustrated is that of winner's curse. When individuals bid for a common-value object, the winner is likely to pay more than what the object is worth (winner's ...
The solution discusses under pricing in public offerings of common stock.