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Review of Financial Studies Vol. 30 No. 3 2017

Pre-market Trading and IPO Pricing

Chun Chang1; Yao-Min Chiang2; Yiming Qian3; Jay R. Ritter4

1 Shanghai Advanced Institute of Finance , Shanghai Jiao Tong University, · 2 National Taiwan University · 3 University of Iowa · 4 University of Florida

Abstract

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 informativeness increases with a stock’s liquidity. The ESM price-earnings ratio shortly before an 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 with little valuation uncertainty. Also, regulations impact the relative bargaining power of players and therefore IPO pricing.

DOI
10.1093/rfs/hhw032
Volume
30
Issue
3
Pages
835-865
Language
en
Sources
bibtex:phds-export.bib crossref openalex

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