Question

) IPO Underpricing. In 1980, a certain assistant professor of finance bought12 initial public offerings of common stock. He held each of these for approximately one month and then sold. The investment rule he followed-was to submit a purchase order for every firm commitment initial public-offering of oil and gas exploration companies. There were 22 of these-offerings, and he submitted a purchase order for approximately $1,000 in-stock for each of these companies. With 10 of these, no shares were allocated to the assistant professor. With 5 of the 12 offerings that were purchased, fewer than the requested number of shares were allocated. The year 1980 was very good for oil and gas exploration company owners:On average, for the 22 companies that went public, the stocks were selling for 80 percent above the offering price a month after the initial offering date.The assistant professor looked at this performance record and found that the$8,400 invested in the 12 companies has grown to $10,000, representing a return of only about 20 percent (commissions were negligible). Did he have bad luck, or should he have expected to do worse than the average initial public offering investor? Explain

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