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:

Ivan Pavlov

A Russian physiologist best known for his work in classical conditioning, demonstrating the learning process through the Pavlov's dogs experiment.

Operant Conditioning

A learning process in which the strength of a behavior is modified by reinforcement or punishment.

Classical Conditioning

A learning process that occurs when two stimuli are repeatedly paired: a response that is at first elicited by the second stimulus is eventually elicited by the first stimulus alone.

Operant Conditioning

A learning process through which the strength of a behavior is modified by reinforcement or punishment, a concept developed by B.F. Skinner.