4 ms·

> No, the banks get underwriting fees as a % of the offer, so they are incented for a higher price as well. What is the counter balance to this? Obviously bank

> No, the banks get underwriting fees as a % of the offer, so they are incented for a higher price as well. What is the counter balance to this? Obviously banks can value a share at abnormally high prices and take a big fee, but clearly that is not happening.

nemanja 6y ago
Counter balance is the free market - if you set the price too high, investors will not buy into it and the price will be adjusted down.
jariel 6y ago
The counterbalance is that they are underwriting the stock, meaning, they are actually buying the stock from the company, and then selling it into the market. The umderwriters are the one's actually putting money up 'ahead of time' at the 'specific price' for the company, which involves some risk obviously. So if the underwriters price too high, they are stuck with shares. The people to first buy shares from the underwriteres are likely other institutional investors, and then large private wealth clients etc.. Understand that this is likely one source of the 'jump' - large institutional investors are not generally buying to flip the stock on the same day, in fact, the underwriters (and even AirBnB) don't want that. They don't want volatility. Ideally, AirBnB sells to the bank/underwriters, the big funds buy from the underwriting bank and then hold. All of this will have been established/prepared for during the roadshow. AirBnB is huge, Fidelity wants a cut, so they'll take an allocation X shares for $Y on 'the day'. Nice, clean, straightforward, not a lot of volatility. Going an 'IPO' is like 'being born' - it's a sensitive time and a lot of money is changing hands you want it to go 'as planned' and 'smoothly'. So there's likely a smaller number of shares really floating out there on day 1, which may enhance the pressure from the demand curve.

4 ms·

> No, the banks get underwriting fees as a % of the offer, so they are incented for a higher price as well. What is the counter balance to this? Obviously bank

by kumarvvr 6y ago

nemanja 6y ago
Counter balance is the free market - if you set the price too high, investors will not buy into it and the price will be adjusted down.
jariel 6y ago
The counterbalance is that they are underwriting the stock, meaning, they are actually buying the stock from the company, and then selling it into the market. The umderwriters are the one's actually putting money up 'ahead of time' at the 'specific price' for the company, which involves some risk obviously. So if the underwriters price too high, they are stuck with shares. The people to first buy shares from the underwriteres are likely other institutional investors, and then large private wealth clients etc.. Understand that this is likely one source of the 'jump' - large institutional investors are not generally buying to flip the stock on the same day, in fact, the underwriters (and even AirBnB) don't want that. They don't want volatility. Ideally, AirBnB sells to the bank/underwriters, the big funds buy from the underwriting bank and then hold. All of this will have been established/prepared for during the roadshow. AirBnB is huge, Fidelity wants a cut, so they'll take an allocation X shares for $Y on 'the day'. Nice, clean, straightforward, not a lot of volatility. Going an 'IPO' is like 'being born' - it's a sensitive time and a lot of money is changing hands you want it to go 'as planned' and 'smoothly'. So there's likely a smaller number of shares really floating out there on day 1, which may enhance the pressure from the demand curve.