Pre-market Trading and IPO Pricing

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 informativeness increases with a stock’s liquidity. The ESM price-earnings ratio shortly before an initial public offering explains about 90% of the variation in the offer price-earnings ratio. However, the average IPO underpricing level remains high, at 55%, suggesting that agency problems between underwriters and issuers can lead to excessive underpricing, even with little valuation uncertainty. Also, regulations impact the relative bargaining power of players and therefore IPO pricing. Received June 4, 2014; accepted April 13, 2016 by Editor Andrew Karolyi.