Which of the following statements accurately describes the association between “information asymmetry” and IPO pricing? a) This hypothesis suggests that IPOs are underpriced, on average, to help reduce the information asymmetry between managers and investors. b) It suggests that the primary motivation for underpricing an IPO is to retain informed investors in the IPO market. c) It suggests that the issuing company has the incentive to underprice an IPO to benefit the existing (original) shareholders prior to firm listing on the exchange. d) None of the other statements accurately describes the association between “information asymmetry” and IPO pricing. e) More than one of other statements accurately describes the association between “information asymmetry” and IPO pricing
Question
Which of the following statements accurately describes the association between “information asymmetry” and IPO pricing? a) This hypothesis suggests that IPOs are underpriced, on average, to help reduce the information asymmetry between managers and investors. b) It suggests that the primary motivation for underpricing an IPO is to retain informed investors in the IPO market. c) It suggests that the issuing company has the incentive to underprice an IPO to benefit the existing (original) shareholders prior to firm listing on the exchange. d) None of the other statements accurately describes the association between “information asymmetry” and IPO pricing. e) More than one of other statements accurately describes the association between “information asymmetry” and IPO pricing
Solution
The concept of "information asymmetry" in relation to IPO pricing is best described by options a) and b).
Option a) suggests that IPOs are underpriced on average to help reduce the information asymmetry between managers and investors. This is because managers typically have more information about the company's true value than investors. By underpricing the IPO, they can attract more investors and reduce the risk of the IPO failing.
Option b) suggests that the primary motivation for underpricing an IPO is to retain informed investors in the IPO market. This is because informed investors are more likely to invest in an IPO if they believe it is underpriced, as this gives them the opportunity to make a profit when the stock's price adjusts to its true value.
Therefore, the answer is e) More than one of other statements accurately describes the association between “information asymmetry” and IPO pricing.
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