Which of the following describes the adverse selection problem for IPOs?
| A. On the announcement of a new equity issue, current stock prices general drop because management has information that the probability of default has risen, limiting the debt capacity and causing the firm to raise equity capital. | |
| B. On the announcement of a new equity issue, current stock prices generally drop, perhaps because the new issue reflects management’s view that common stock is currently overvalued. | |
| C. An investor who participates in an offering that is expected to be just fairly priced is likely to make a negative return and thus would not wish to participate. | |
| D. An investor who participates in an offering that is expected to be just fairly priced is likely to make a positive return and thus would wish to participate. | |
| E. None of the above |
