The Underpricing and Excess Returns of Initial Public Offerings in Taiwan Based on Noisy Trading: A Stochastic Frontier Model

The Underpricing and Excess Returns of Initial Public Offerings in Taiwan Based on Noisy Trading:... Initial public offerings (IPOs) are typically offered at prices lower than the transaction price in the early aftermarket. With a stochastic frontier model, we measured the fair offer price of an IPO and then the deliberate IPO underpricing and the market misvaluation based on the estimated fair offer price. Our results show that IPOs are deliberately underpriced. The extent of noisy trading leading to significantly higher market transaction prices explains the excess IPO returns. We conclude that initial IPO returns result primarily from the noisy trading activities instead of the deliberate IPO underpricing. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

The Underpricing and Excess Returns of Initial Public Offerings in Taiwan Based on Noisy Trading: A Stochastic Frontier Model

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Publisher
Kluwer Academic Publishers
Copyright
Copyright © 2002 by Kluwer Academic Publishers
Subject
Finance; Corporate Finance; Accounting/Auditing; Econometrics; Operation Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1023/A:1014565018160
Publisher site
See Article on Publisher Site

Abstract

Initial public offerings (IPOs) are typically offered at prices lower than the transaction price in the early aftermarket. With a stochastic frontier model, we measured the fair offer price of an IPO and then the deliberate IPO underpricing and the market misvaluation based on the estimated fair offer price. Our results show that IPOs are deliberately underpriced. The extent of noisy trading leading to significantly higher market transaction prices explains the excess IPO returns. We conclude that initial IPO returns result primarily from the noisy trading activities instead of the deliberate IPO underpricing.

Journal

Review of Quantitative Finance and AccountingSpringer Journals

Published: Oct 13, 2004

References

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