Abstract

In this study we applies Black and Scholes option pricing model to structure two indicators to determine the relationship between the IPO price and underwriting fees under the new underwriting system established in Taiwan in 2005. Our empirical study shows that in most cases, IPO prices are substantially lower than the stock price on the IPO pricing date. Underwriters normally gain excess risk premium through charging underwriting fees under the new underwriting system. Given that IPO prices are known, most underwriters will charge fees according to the regulated minimum operating expense of TWD 5M since the potential underwriting risk is fairly low. Assuming that underwriting fees are known, the IPO prices will be relatively lower when estimated through actual underwriting fee charges. In addition, we find a significant relationship existing between the underwriting system version and the relative IPO price, while the relative IPO prices are lower under the new underwriting system. In regards to the removal of price limits for the first five trading days, our testing result shows that the relative IPO price is correlated to whether the lowest price drops below the offering price, while no relationship exists with the price performance on the first five trading days. This indicates that the stock price on the IPO date can provide certain reference value for underwiters to lower their underwriting risk. Furthermore, the policy of removing the price limits on the first five trading dates can quickly reflect the justified price of the market.  

Keywords

the new underwriting system offering price underwriting fees