Work

Testing for Deliberate Underpricing in the IPO Premarket: A Stochastic Frontier Approach

Year: 1996

Type: article

Abstract: We reevaluate the IPO underpricing phenomenon using the stochastic frontier methodology. The advantage of the stochastic frontier is that it can be used to measure the level of deliberate underpricing in the premarket without using after-market information. This is accomplished through the estimation of a systematic one-sided error term that measures “inefficiency” or the difference between the maximum predicted offer price and the actual offer price. Data for the analysis are comprised of 1,035 IPOs of common stock issued by firm commitment between 1975 and 1984. IPOs appear to be deliberately underpriced in the premarket in both hot-market and nonhot-market periods. Moreover, the determinants of the maximum IPO price have different effects in the two time periods.

Source: Review of Financial Studies

DOI: 10.1093/rfs/9.4.1251

Authors: Janet Hunt-McCool, Samuel C. Koh, Bill B. Francis

Institutions: University of North Carolina at Charlotte, Georgetown University Medical Center

Language: English

Topic: Financial Markets and Investment Strategies

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: green

OpenAlex ID: W1986974585

FWCI: 2.397

Cites: 30

Cited by: 100

Related to: 10