a) In the context of Initial Public Offerings (IPO) explain what is under-pricing. [5 marks] b) Discuss in detail some of the explanations for under-pricing. [15 marks]

a) In the context of an IPO, underpricing is when the closing price on the first day of trading in the stock is higher than the offer price set at the time of IPO. In other words, the market has valued the stock higher than its IPO price on the first day it became available for trading.

b) There are various explanations for under-pricing:

• The IPO price may be deliverately kept low in order to boost investor participation and encourage investors to apply for the IPO.
• It may be underpriced unintentionally as valuing an unlisted company is a complicated process which involves factoring in various complex factors such as market conditions, company's fundamentals, future prospects, political factors etc.