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The investment bank sells a lot of shares to its own preferred clients. If the price then drops (because the initial offering price was too high) those preferred clients lose money.

So the bank has every incentive to price it low, and usually does. So when the market goes even lower, we know that the IPO was done out of desperation and that early investors who had influence over the IPO price were eager to dump some or all of their positions.

One day is too soon to know for certain that this happened. But if the price is still down a week or two later then it probably did.




> So when the market goes even lower, we know that the IPO was done out of desperation

How is that the correct conclusion. It sounds like the correct conclusion is they still over estimated the market price. Nothing about desperation for or against.


> It sounds like the correct conclusion is they still over estimated the market price

The bank has every incentive not to do that. The bank must juggle the needs of its various constituencies, preferred investors (who provide capital expecting not to have it lose value right away), the firm (which wants to raise capital) and existing investors (who may want to liquidate).

If a bank routinely over-prices IPOs, then preferred investors will stop providing capital. If the bank routinely under-prices IPOs, then firms will choose other banks to underwrite their IPOs.

In addition to the above, the investment bank owns a lot of inventory and strategically buys and sells in order to help keep the price close to the expected price. When this doesn't happen, it might be because the bank couldn't afford to constrain the price movement and had to settle for the bad optics.

This is how the system is supposed to work, but the main reason an IPO would be over-priced (all things considered) is if the existing investors had too much say in the price, since this tarnishes the bank's credibility for future IPOs events.


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No, I said it is too soon to tell, and that it has more to do with the balance of power going into the IPO.


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They explained it pretty succinctly. Grossly oversimplified: the bank is motivated to accurately price in order to preserve future business from e.g. institutional investors. Overprice and your investors bleed. Substantially underprice and you leave money on the table, less likely to be picked for future offerings. Come close and everyone's generally pretty happy.

I'd be keen to hear why you believe it's "just not right at all."


>If the price then drops (because the initial offering price was too high) those preferred clients lose money.

Unless these preferred clients are active traders, this isnt a problem. Remember when government nixed fiduciary resposibility?

Just slide a soon-to-drop, over-valued-at-IPO stock into say,... someones' retirement account? Wouldnt it be weird if a bunch or Morgan-Stanley-managed 401Ks were shifted to include that?

Especially if the bank managing the IPO gets a cut of the cash, there's no downside to such. At least for them.


If the underwriter has every incentive to lowball the price, why on earth was Morgan Stanly selling its clients ways to short the Lyft IPO?

https://techcrunch.com/2019/04/05/morgan-stanley-which-is-un...


Here's another theory that they were not [0].

[0] https://www.bloomberg.com/opinion/articles/2019-05-07/lyft-s...




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