The Most Likely Reason That Underpricing of New Issues Occurs

question 2

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:

Salience

The quality of being particularly noticeable or important; the state or condition by which something stands out from its surroundings or background in perception.

Behavioral Contrast

A phenomenon in which the rate of response varies according to a change in the reinforcement of an alternative behavior.

Counterconditioning

A behavioral therapy technique that involves teaching the subject to associate a positive response with a stimulus that previously elicited a negative response.

Reciprocal Inhibition

Wolpe’s term for the idea that only one emotional state can be experienced at a time.