Pre-Market and IPO Pricing: Evidence from Taiwan

Does IPO stand for Instant Profit Opportunity or It’s Probably Over-priced? The conundrum is that both answers are generally correct. The answer appears to depend on the investor’s investment horizon. This realization provides an enigma for the Efficient Market Hypothesis (EMH) proponents. It is widely known that initial public offering (IPO) stocks in the past have typically been underpriced, thereby allowing the fortunate purchaser to buy the shares in the primary market and systematically beat the stock market averages. This phenomenon is evidenced by the average one-day returns on IPOs of 15% and presents a puzzle to efficient market advocates. Behavioral finance posits that the same underpriced IPO stocks will under-perform the market and deliver substandard performance during the ensuing one to three years. At a minimum, the “new-issues puzzle” presents a challenge to the EMH and has given rise to many class-action stockholder lawsuits alleging illegal price manipulation. Why under-pricing systematically happens and why issuing firms/major shareholders choose to leave copious amounts of money on the table is not well explained by traditional financial theory. Behavioral finance melds together investor psychology and normative financial theory in an attempt to explain this market enigma.

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A Preliminary Study of the Emerging and Developing Stock Market of China

Journal of Business Theory and Practice ◽

10.22158/jbtp.v2n1p100 ◽

2014 ◽

Vol 2 (1) ◽

pp. 100

Author(s):

Hai Long

Keyword(s):

Stock Market ◽

Foreign Currency ◽

Chinese Stock Market ◽

Significant Development ◽

Listed Firms ◽

Ipo Performance ◽

Growth Enterprise Market ◽

New Findings ◽

Ipo Pricing ◽

Preliminary Study

The Chinese share market as an emerging and fast-growing listing venue has experienced a significant development since 2000.Prior studies on this market overwhelmingly concentrate on IPO-pricing-related and post-IPO performance-based propositions with lagging data. Adopting the updated data within the last couple of years, this paper comprehensively explores and accounts for some striking features of the Chinese stock market, and unfolds some new causes contributing to these characteristics. Some new findings are revealed. 1) Two new factors may lead to the extreme under pricing in China’s market, which are the unseasoned investor sand their high demands of IPO shares. 2) The foreign-currency trading platform is not effective and efficient to attract the overseas investors. 3) The imbalanced industry structure of the listed firms is very significant, the Chinese share market is dominated by the manufacturing firms.4) The Growth Enterprise Market of China is essential to address the long-standing financing difficulties for the Chinese Small and Medium-sized Enterprises, which are unqualified to raise capital from the Primary Stock Market.

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