Pre-Market Trading and IPO Pricing

Review of Financial Studies, Forthcoming

47 Pages Posted: 5 Mar 2014 Last revised: 6 May 2016

See all articles by Chun Chang

Chun Chang

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF)

Yao-Min Chiang

National Taiwan University - Department of Finance

Yiming Qian

University of Connecticut

Jay R. Ritter

University of Florida - Department of Finance, Insurance and Real Estate

Date Written: May 2, 2016

Abstract

By studying the only mandatory pre-IPO market in the world – Taiwan’s Emerging Stock Market (ESM), we document that pre-market prices are very informative about post-market prices and that the informativeness increases with a stock’s liquidity. The ESM price-earnings ratio shortly before the initial public offering explains about 90% of the variation in the offer price-earnings ratio. However, the average IPO underpricing level remains high, at 55%, suggesting that agency problems between underwriters and issuers can lead to excessive underpricing even when there is little valuation uncertainty. Also, regulations impact the relative bargaining power of players and therefore IPO pricing.

Keywords: initial public offering, pre-IPO market, IPO underpricing, agency problem, rent-seeking underwriter, bookbuilding theory, information asymmetry, Taiwan stock exchange

JEL Classification: G14, G15, G18, G24, G32

Suggested Citation

Chang, Chun and Chiang, Yao-Min and Qian, Yiming and Ritter, Jay R., Pre-Market Trading and IPO Pricing (May 2, 2016). Review of Financial Studies, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2402806 or http://dx.doi.org/10.2139/ssrn.2402806

Chun Chang

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF) ( email )

Shanghai Jiao Tong University
211 West Huaihai Road
Shanghai, 200030
China

Yao-Min Chiang

National Taiwan University - Department of Finance ( email )

No.1 Sec. 4, Roosevelt Rd.
Taipei, 10605
Taiwan
+886 -2 -33661089 (Phone)

Yiming Qian (Contact Author)

University of Connecticut ( email )

2100 Hillside Road U-1041F, Room 452
Storrs, CT 06269
United States
860-486-2774 (Phone)

Jay R. Ritter

University of Florida - Department of Finance, Insurance and Real Estate ( email )

P.O. Box 117168
Gainesville, FL 32611
United States
(352) 846-2837 (Phone)
(352) 392-0301 (Fax)

HOME PAGE: http://bear.cba.ufl.edu/ritter

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