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The Process of an Initial Public Offering (Ipo). the Underpricing Problem.

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1. Introduction
All companies need to raise capital at one time or another, first of all to start-up their business, and then to finance new projects and expand operations. Most of them start out by raising money from private sources, with no liquid market existing if the investors wish to sell their stock. A lot of new ventures rely initially on these internal funds, which come mostly from relatives and friends; some other firms, instead, receive help from the so-called “angel investors”. Furthermore, in some countries as Italy, debt (bank loans) is the main form of financing. Indeed, even after the start-up, there are many successful entrepreneurs (e.g. IKEA, Domino’s Pizza and Levi Strauss) who continue to operate successfully as …show more content…

This is a complex decision, deeply influenced by the company, the success of marketing researches, current market conditions and, last but not least, the contractual form which connect the firm and the investment bank. With a best efforts contract, a price and a range of shares to be sold are fixed before collecting information about the state of demand; then, there is a period, usually 90 days, in which the underwriter must make its “best efforts” to sell the shares to the public (if the minimum stock is not sold, the offer is withdrawn and investors refunded).
When a firm commitment contract is signed, instead, the investment bank usually adopt the book-building method: it constructs a demand curve, thanks to the information collected during the road show. As a consequence, it is possible to decide on the stock amount and the offer price in a more accurate way; this can be translated in a sensible reduction of unallocated shares, a risk which none of the banks under this kind of contract wants to run (in fact, they guarantee to raise a certain amount by buying the whole offer first, and then reselling to the investors!). The number of companies using this method is growing throughout the world, even in the U.K. where is nevertheless more used the “fixed price offer” method.
At this time, there is just one thing left to do: starting selling the securities on the stock market and collecting money from investors.
As we can see, pricing is probably the longest and

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