Background
Under-subscription occurs when the demand for newly issued shares is less than the supply offered by the issuing entity. This situation can lead to unsold shares or those picked up by underwriters, who insure or back the issuance of the shares to the public.
Historical Context
Securities issuance has been a fundamental aspect of capital markets for centuries. However, under-subscription often surfaces during periods of economic downturn, uncertainty, or when the issuing company is not well-received by investors. Historically, initial public offerings (IPOs) have occasionally experienced under-subscription, affecting the perceived value of the company and its market performance.
Definitions and Concepts
- Under-subscription: When applications for shares in a new issue do not match the number of shares offered, leading to unsold shares.
- Underwriting: Process whereby underwriters commit to buying the unsold portion of the shares from an issuer, ensuring the issuing company raises the intended capital.
Major Analytical Frameworks
Classical Economics
Classical economists might analyze under-subscription in light of market supply and demand. They would assert that inadequate demand signifies the market’s valuation, informing the pricing adjustments.
Neoclassical Economics
Neoclassical economics would delve into factors like perceived investor utility, risk preference, and information asymmetry that might lead to under-subscription.
Keynesian Economics
Keynesians would factor in macroeconomic instability or lack of investor confidence during economic downturns that stir under-subscription dynamics.
Marxian Economics
Marxian analysis could assess under-subscription through the lens of capital accumulation, corporate strategy failures, and unequal capital market access.
Institutional Economics
Institutionalists may focus on the rules, norms, and institution functions around share issuance, including regulatory impacts and credibility factors influencing investor decisions.
Behavioral Economics
Behavioral economists examine psychological elements—investor sentiments and biases—that might cause apprehension, leading to an under-subscription event.
Post-Keynesian Economics
Post-Keynesians scrutinize state interventions and structural causes that impact financial market stability and thereby contributing to share demand.
Austrian Economics
Austrians would emphasize the subjective valuations and expectations aligned with the individual reasoning informing under-subscription phenomena.
Development Economics
Development enthusiasts examine under-subscription in emerging markets showing inadequate local investor engagement or international crowdfunding complications.
Monetarism
Monetarists link under-subscription with monetary policies impacting interest rates and liquidity, influencing the investment landscape.
Comparative Analysis
Understanding under-subscription requires scrutinizing assumed risks versus investor perception realities. Cases typically requiring underwriters to step in highlight discrepancies in issuer and investor expectations. Comparisons across different economic theories reveal distinct influencing factors like market conditions, regulatory environments, or investor psychology.
Case Studies
- Snap Inc. (SNAP) IPO Incident
- Facebook Initial Public Offering (IPO) 2012
- WeWork’s Cancelled IPO 2019
Suggested Books for Further Studies
- “The Intelligent Investor” by Benjamin Graham
- “The Little Book of Behavioral Investing” by James Montier
- “Investment Valuation” by Aswath Damodaran
Related Terms with Definitions
- Initial Public Offering (IPO): The process by which a private company offers shares to the public for the first time.
- Underwriting: A financial service wherein underwriters assess risks and agree to buy shares not sold in an issue.
- Share Allocation: Distribution of shares offered during an IPO to different investors.
- Risk Diversification: Strategy to distribute and manage potential risks across various financial assets.
