IPO underpricing and flotation methods in Taiwan – a stochastic frontier approach

Abstract

Adopting stochastic frontier analysis, this article studies the pricing model and underpricing phenomenon of the initial public offerings (IPOs) in Taiwan and further elucidates the potential impact of offering mechanisms on underpricing. The sampling period is from 1996 to 2003, in which 647 IPOs are selected. Empirical results suggest that issuing firms with greater earning potentials, less risk or less asymmetric information have lower underpricing. Furthermore, the variables included to explain underpricing are mostly significant, especially the proxy variable for flotation method. Observed mean IPO underpricing is 20.59% in the sample period, compared to 17.12% for the subgroup using the auction method. This statistically significant difference implies that the introduction of the auction method can help reduce IPO underpricing.