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Testing for deliberate underpricing in the IPO premarket: a stochastic frontier approach |
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| Authors: | Hunt-McCool J; Koh SC; Francis BB |
| Institution: | 1 The Associates, Irving, TX, USA 2 University of North Carolina at Charlotte, USA z Corresponding author at: Georgetown University Medical Center, 2233 Wisconsin Avenue NW Suite 525, Washington, DC 20007, USA |
| Abstract: | We reevaluate the IPO underpricing phenomenon using the stochasticfrontier methodology. The advantage of the stochastic frontieris that it can be used to measure the level of deliberate underpricingin the premarket without using after-market information. Thisis accomplished through the estimation of a systematic one-sidederror term that measures 'inefficiency' or the difference betweenthe maximum predicted offer price and the actual offer price.Data for the analysis are comprised of 1,035 IPOs of commonstock issued by firm commitment between 1975 and 1984. IPOsappear to be deliberately underpriced in the premarket in bothhot-market and nonhot-market periods. Moreover, the determinantsof the maximum IPO price have different effects in the two timeperiods. |
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