Testing for Deliberate Underpricing in the IPO Premarket: A Stochastic Frontier Approach

REVIEW OF FINANCIAL STUDIES, Vol. 9 No. 4

Posted: 29 Jan 1997

See all articles by Janet C. Hunt-McCool

Janet C. Hunt-McCool

affiliation not provided to SSRN

Samuel C. Koh

The Associates

Bill B. Francis

University of South Florida - College of Business Administration

Abstract

We re-evaluate the IPO underpricing phenomenon using the stochastic frontier methodology. The advantage of the stochastic frontier is that it can be used to measure the level of deliberate underpricing in the premarket without using aftermarket information. This is accomplished through the estimation of a systematic one-sided error term that measures "inefficiency" or the difference between the maximum predicted offer price and the actual offer price. Data for the analysis are comprised of 1035 initial public offers of common stock issued by firm commitment between 1975-1984. IPOs appear to be deliberately underpriced in the premarket in both hot market and non-hot market periods. Moreover, the determinants of the maximum IPO price have different effects in the two time periods.

JEL Classification: G12

Suggested Citation

Hunt-McCool, Janet C. and Koh, Samuel C. and Francis, Bill B., Testing for Deliberate Underpricing in the IPO Premarket: A Stochastic Frontier Approach. REVIEW OF FINANCIAL STUDIES, Vol. 9 No. 4, Available at SSRN: https://ssrn.com/abstract=8078

Janet C. Hunt-McCool (Contact Author)

affiliation not provided to SSRN

Samuel C. Koh

The Associates

Irving, TX
United States

Bill B. Francis

University of South Florida - College of Business Administration ( email )

4202 E. Fowler Avenue, BSN 3403
Dept. of Finance
Tampa, FL 33620-5500
United States
813-974-6300 (Phone)
813-974-3030 (Fax)

HOME PAGE: http://www.coba.usf.edu/departments/finance/facult

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