The Most Likely Reason That Underpricing of New Issues Occurs

question 99

Multiple Choice

The most likely reason that underpricing of new issues occurs more frequently than overpricing is the:

• A)underwriters' desire to reduce the risk of a firm commitment.
• B)demand for a new issue is typically too high.
• C)underwriters earn low rates of return.
• D)issuing firms demand that equity be underpriced.

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Definitions:

Social Desirability

The tendency of respondents to answer questions in a manner that will be viewed favorably by others, which can bias survey and research outcomes.

Cognitive Dissonance

A psychological phenomenon where there is a feeling of uncomfortable tension which comes from holding two conflicting thoughts in the mind at the same time.

Carryover Effect

A phenomenon where the effect of a previous condition persists and influences performance in subsequent conditions in a study.

Self-Serving Bias

A cognitive bias where individuals attribute their successes to internal factors and their failures to external factors.