What is ‘Undersubscribed’

A situation in which the demand for an initial public offering of securities is less than the number of shares issued. Also known as an “underbooking”.

Explaining ‘Undersubscribed’

Typically, the goal of a public offering is to price the security issue at the exact price at which all the issued shares can be sold to investors, so there will be neither a shortage nor a surplus of securities. If there is more demand for a public offering than there is supply (shortage), it means a higher price could have been charged and the issuer could have raised more capital. On the other hand, if the price is too high, not enough investors will subscribe to the issue and the underwriting company will be left with shares it either cannot sell or must sell at a reduced price, incurring a loss. Sometimes, when underwriters can’t find enough investors to purchase IPO shares, they are forced to purchase the shares that could not be sold to the public (also known as “eating stock”).

Further Reading

  • Share issue privatizations as financial means to political and economic ends – www.sciencedirect.com [PDF]
  • Behavioral finance in corporate governance: economics and ethics of the devil's advocate – link.springer.com [PDF]
  • Allocations, adverse selection, and cascades in IPOs: Evidence from the Tel Aviv Stock Exchange – www.sciencedirect.com [PDF]
  • Crisis and responses: the Federal Reserve in the early stages of the financial crisis – www.aeaweb.org [PDF]
  • Three essays on financial economics – lib.dr.iastate.edu [PDF]
  • Behavioral Finance in Corporate Governance-Independent Directors, Non-Executive Chairs, and the Importance of the Devil's Advocate – www.nber.org [PDF]
  • Stock market efficiency and economic efficiency: is there a connection? – onlinelibrary.wiley.com [PDF]
  • On Balanced Protection of Creditors' Interest under Subscribed Registered Capital System – en.cnki.com.cn [PDF]