Issue link: https://www.e-digitaleditions.com/i/63810
University of Notre Dame Faculty Challenges Management Myths ND Faculty Question Conventional Wisdom When Notre Dame Finance Professor Tim Loughran began charting the average "first day" returns of Initial Public Offerings (IPOs) over the past two decades, he noticed an inter- esting trend. He discovered that investment bankers who facilitate the distribution of company shares tend to undervalue stock. One result is that the company "nets" significantly less money from the initial offering. "When firms go public, they hire an investment banker who markets the company and facilitates the distribution of shares," says Loughran. "Investment bankers advise the company on a fair stock price. This price is usually undervalued in order to help the company get its foot in the door on opening day." However, the recent escalation of underpricing—from 7% undervalued in the 1980s to 65% in 1999 and 2000—has taken underpricing to a new level, he says. "When stock is undervalued, it tends to favor the investment bankers who are hired to facilitate the stock transaction." Loughran's advice to companies going public: "Determine a rea- sonable price for your stock, then drive a hard bargain with the investment bankers." For more information, call: 219.631.7236 www.nd.edu/~ndbizmag