A Comparative Investigation on Initial Returns of IPOs under Formula and Bookbuilding Pricing Methods

Bookbuilding pricing has become the mainstream in initial public offering (IPO) market since the reformation of underwriting system in 2005; however, the underpricing problem is even worse by the bookbuilding. The thesis is to compare bookbuilding price to the fixed price derived from reference pricing formula and explore how the independent variables in the formula affect price and initial returns. The sample used is the IPOs using bookbulding pricing method in Taiwan’s Stock Exchange and Over-the-Counter market during the period from 2005 to 2015. The empirical result of t-test shows that formula price initial return is significantly lower than the bookbuilding price’s. Therefore, using the reference pricing formula can decrease underpricing problem. Also, all the dependent variables are significantly positively correlated with bookbuilding price, formula price and the real closed price. Overall, reference pricing formula is better than bookbuilding in reflecting IPO’s value.