Pricing Taiwan's Initial Public Offerings

Abstract

This paper has employed the nonparametric minimum convex input requirement set (MCIRS) approach to measure the premarket underpricing and aftermarket inefficiency in Taiwan's initial public offerings (IPOs). The empirical results show that first, the average level of underpricing in Taiwan's IPO premarket is 15.66%, and underpricings in the hot-and nonhot-market periods are not different. Second, underpricing in the electronic IPOs (purchased by both (informed) institutional investors and (uninformed) individual investors) is not different from that in the non-electronic IPOs (purchased by (uninformed) individual investors). This result may not be consistent with Rock's (1986) winner's curse explanation for IPO underpricing. Third, in the nonhot-market period, premarket underpricing disappears one week after trading (i.e. there is no aftermarket inefficiency), and in the hot-market period, new issues are overpriced one week after trading (i.e. there is an aftermarket inefficiency). The paper also finds that the commonly used method of valuing IPOs with priceearnings (P/E), market-to-book and price-to-sales multiples of comparable firms performs poorly in Taiwan's IPOs. The predictability of the comparable firms method improves when the market values-to-sales and enterprise value-to-sales multiples are used.JEL classification: G11, G14, and G32

How Do Investment Banks Price Initial Public Offerings? An Empirical Analysis of Emerging Market

“…In the literature of post-issue financial data based valuation studies conclude that the most of authors completely rely on comparable multiples, on the basis of similar industry, size, revenue growth and earnings, valuation methods to estimate a fair value of issuing firm's equity while very few studies, only compare the valuation estimates using DCF and comparable multiples method. Boatsman and Baskin (1981), Alford (1992), Chang and Tang (2007) argue that P/E selected on the basis of industry membership produce more valuation accuracy than selected on the basis of other benchmarks, while (Purnanandam and Swaminathan 2004;Chang and Tang 2007;Campbell et al 2008;Colaco et al 2013) P/E selected on the basis of forward earnings produce higher valuation accuracy than the price/EBITDA and price/sales multiples. Kaplan and Ruback (1995), Gilson et al (2000) and Berkman et al (2000) found a similar valuation accuracy for DCF and comparable multiples.…”

“…Second, this study employs 'real-world' estimations disclosed in the prospectus to investigate the value relevance of valuation models when pricing IPOs, in contrast to Colaco et al (2013Colaco et al ( , 2017, Yoon (2015), Chang and Tang (2007), Purnanandam and Swaminathan (2004) and Kim and Ritter (1999), who used ex post price estimates. Few studies investigate the accuracy of earnings forecasts when valuing IPOs instead of focusing on value relevancy (e.g., Herawati et al 2017;Campbell et al 2008;How et al 2007;Jog and McConomy 2003;Gonoupolis 2003;Chen and Firth 1999), while DeAngelo (1990) use 'real-world' estimations for management buyouts but do not discuss the value relevancy.…”

Underwriter reputation and IPO valuation in an emerging market: evidence from Malaysia

“…Before proceeding to describe the certification role of underwriters, the present study suggests that firms should determine the appropriate valuation method for estimating the intrinsic values. The present study adopted the price-multiple method to estimate the intrinsic values of IPOs (Cassia et al , 2004; Chang and Tang, 2007; How et al , 2007; Kim and Ritter, 1999; Purnanandam and Swaminathan, 2004). In Malaysia, the abolishment of guidelines on using price-to-earnings (P/E) in IPO pricing in 1996 has enabled underwriters to employ other valuation methods to estimate the intrinsic values.…”

IPO Valuation and IPO Inter-Industry Effects

“…P/V ratios or fundamental variables used to compute P/V ratios are publicly available and it is easy to communicate these ratios (Sahoo and Rajib, 2013). In this type of analysis, IPO firms and their public peers are compared based on P/V ratios (Alford, 1992;Bhojraj and Lee, 2002;Cassia, Paleari and Vismara, 2004;Chang and Tang, 2007;Cotter, Goyen and Hegarty, 2005;Firth, Li and Wang, 2008;Kim and Ritter, 1999;LeClair, 1990;Lie and Lie, 2002;Sahoo and Rajib, 2013). Among all, Purnanandam and Swaminathan (2004) match IPO firms with a peer from the same sector and similar size.…”

“…The theory does not specify how to measure the mispricing. As a result, several studies developed different models to measure mispricing: Managers would issue equity if their equity is overpriced relative to historical prices (Baker and Wurgler, 2002;Schultz, 2003); book values (Baker and Wurgler, 2002); book-to-market ratios (Pagano et al, 1998); fundamental ratios such as price-to-earnings, market-to-book, and price-to-sales (Alford, 1992;Bhojraj and Lee, 2002;Chang and Tang, 2007;Cotter et al, 2005;Firth et al, 2008;Kim and Ritter, 1999;Sahoo and Rajib, 2013) or P/V ratios computed based on peer companies' fundamental values such as sales, EBITDA, and earnings (Gupta and Suri, 2017;How et al, 2007;Ong et al, 2021;Purnanandam and Swaminathan, 2004). The common outcome of all these studies is that companies prefer going public when their equity is overpriced.…”