“Pre-Market Trading and IPO Pricing” by Jay R. Ritter
University of Florida
National Taiwan University
University of Iowa
Shanghai Jiaotong University
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 trading liquidity of the stock. The ESM price-earnings ratio shortly before the IPO explains about 90% of the variation in the offer price-earnings ratio. However, the average IPO underpricing level remains high, at 55%. Our evidence suggests 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.