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

35 Pages Posted: 8 Nov 1999

See all articles by Anlin Chen

Anlin Chen

National Sun Yat-sen University - Department of Business Management

C. T. Hong

National Sun Yat-sen University

Chin-Shun Wu

National Sun Yat-sen University

Date Written: March 1999

Abstract

It is well known that initial public offerings (IPOs) are typically offered at prices lower than the transaction prices in the early aftermarket. However, the gap between the offer price and the aftermarket transaction price may be attributed to the underpricing of IPOs or the noisy trading activities in the early aftermarket. In this paper, we employ a stochastic frontier model to measure the fair offer price of an IPO and then measure the deliberate underpricing of the IPO and the market misvaluation based on the estimated fair offer price. Our results show that IPOs are deliberately underpriced. However, the extent of underpricing is not related to the hotness of the market. Instead, the extent of noisy trading leading to the market transaction price explains the excess return of IPOs, which is related to the hotness of the market. Hence, we conclude that IPO initial returns mostly result from the noisy trading activities instead of the deliberate underpricing of IPOs.

JEL Classification: C67, G30

Suggested Citation

Chen, Anlin and Hong, C. T. and Wu, Chin-Shun, The Underpricing and Excess Returns of Initial Public Offerings in Taiwan Based on the Noisy Trading: A Stochastic Frontier Model (March 1999). Available at SSRN: https://ssrn.com/abstract=189912 or http://dx.doi.org/10.2139/ssrn.189912

Anlin Chen (Contact Author)

National Sun Yat-sen University - Department of Business Management ( email )

Kaohsiung 80424
Taiwan
886-7-5252000x4656 (Phone)
886-7-5254698 (Fax)

C. T. Hong

National Sun Yat-sen University

70 Lien-hai Rd.
Department of Business Management
Kaohsiung 80424
Taiwan ROC

Chin-Shun Wu

National Sun Yat-sen University ( email )

70 Lien-Hai Road
Kaohsiung City 80424
Taiwan

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