Firms Underprice New Issues of Common Stock for the Following

question 54

Multiple Choice

Firms underprice new issues of common stock for the following reason(s) :

• A) when additional shares are issued, each share's percent of ownership in the firm is diluted, thereby justifying a lower share value.
• B) when the market is in equilibrium, additional demand for shares can be achieved only at a lower price.
• C) many investors view the issuance of additional shares as a signal that management is using common stock equity financing because it believes that the shares are currently overpriced.
• D) all of the above.

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Definitions:

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