One popular related explanation for the high and severe underpricing of 65% during
the Internet bubble (1999-2000) for the U.S IPOs, a peak never reached before in the U.S IPO
market, is that underwriters could not justify a higher offer price on Internet IPOs. Even if
these firms have a high potential of profitability in the recent future and they are operating in
a new but very promising field which will generate high returns later, the underwriters can not
justify this and propose a higher offer price. These firms are seen as young and operating in a
new field which means that their offerings are risky and they propose risky shares. Proposing
a higher offer price will not be accepted by investors and will make them fear the offerings.
The issuing firms have to propose a low offer price to incite investors to participate in the
offerings even if they are thought to be risky. So, we can say on one hand, the newly issuing
Internet firms are very important and are operating in a very promising field and then will
generate high returns, but all this can not be justified by their underwriters and they do not
find the convincing arguments. On the other hand, and since they are operating in a new field
not very known and they are very young firms without a history of returns, they are thought to
be risky. So, we are in the same explanation of risk due to valuation uncertainty which was
proved to be ineffective determinant and explanation for the underpricing anomaly.
So to explain the severe level of underpricing during the dot-com period, only the
inability to justify a higher offer price can be considered as a possible explanation, but the fact
of young and so risky firms can not be used as a relevant explanation.