Pre-Market Trading and IPO Pricing
Review of Financial Studies, Forthcoming
47 Pages Posted: 5 Mar 2014 Last revised: 6 May 2016
Date Written: May 2, 2016
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: Suggested Citation