Adjusting toward the Appropriate Underpricing of Initial Public Offerings: Evidence from Stock Exchange of Thailand

Abstract

ABSTRACT

            In general, initial public offerings (IPO) stocks are underpriced as documented in numerous studies, mostly from the U.S. As documented by Ritter (1984), the average IPO stocks were underpriced at 18.8 percent o higher. This paper is not aiming at proving that Thai IPO stocks are underpriced. Instead the objective of this paper I to show that investment banks did not set the price appropriately or this not leave any money for the investors to compensate the ex ante uncertainty of IPO stocks in the sample of before crisis. The result form the test of Proposition II indicates that most of the time during before crisis. The result from the study shows that investment banks underpriced the IPO at 0.77 percent which is insignificant different from zero crisis. However, the study finds that during crisis the investment bank did leave more money on the table for the inventors compensating for the ex ante uncertainty and initial return during crisis. Moreover, the relation between change in market share of the investment and mispricing set by investment banks was found but it is insignificant. The results from this study are to support two statements:

1. The underpricing in Thai stock market facilitate by the investment banks will be appropriately enforced once there are more institutional investors participate in the market. There is strong evidence of the positive relation between ex ante uncertainty and initial return during crisis and total sample whereas such strong evidence did not found during before crisis total sample whereas such strong evidence did not found during before crisis period.
2. There is weak evidence on the penalty impounded on the underwriters who try to cheat on the investors and issuing firms by underpriced by too much or too little by the market.