Pricing Taiwan's Initial Public Offerings

This paper has employed the nonparametric minimum convex input requirement set (MCIRS) approach to measure the premarket underpricing and aftermarket inefficiency in Taiwan's initial public offerings (IPOs). The empirical results show that first, the average level of underpricing in Taiwan's IPO premarket is 15.66%, and underpricings in the hot- and nonhot-market periods are not different. Second, underpricing in the electronic IPOs (purchased by both (informed) institutional investors and (uninformed) individual investors) is not different from that in the non-electronic IPOs (purchased by (uninformed) individual investors). This result rejects Rock's (1986) winner's curse explanation for IPO underpricing. Third, in the nonhot-market period, premarket underpricing disappears on one week after trading (i.e., there is no aftermarket inefficiency), and in the hot-market period, new issues are overpriced on one week after trading (i.e., there is an aftermarket inefficiency). The paper also finds that the commonly used method of valuing IPOs with price-earnings (P/E), market-to-book and price-to-sales multiples of comparable firms performs poorly in Taiwan's IPOs. The predictability of the comparable firms method improves when the market values-to-sales and enterprise value-to-sales multiples are used.