Pre Market Trading and IPO Pricing: Evidence from Taiwan
We study 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 the pre market price efficiency increases with trading liquidity. Pre market prices are utilized in IPO pricing. The ESM price earnings ratio shortly before the IPO explains about 90% of the variation in the price earnings ratio calculated using the offer price. Moreover, the more informative the pre market price is, the higher the offer price (i.e. the lower the underpricing) However, the average IPO underpricing level remains high despite the pre market. We provide evidence that this is due to underwriters' rent seeking behavior, suggesting that agency problems can lead to high levels of underpricing even when there is little information asymmetry or valuation uncertainty about the stock.