On the association between IPO underpricing and reversal and Taiwan's regulatory reforms for mandatory forecasts

摘要

The unique institutions in Taiwan may add to our understanding of the effect of initial public offering (IPO) firm disclosures. Consistent with the notion of market mispricing, most of Taiwan's IPOs were with consecutive up-limit hits followed by substantial price reversals. In this study, we decompose IPO underpricing into two components: pure underpricing and subsequent reversal, exploring the impact of the 1991 mandate that IPO firms should include their management forecasts in the prospectuses on these two anomaly measures. Our results support the notion that disclosure regulations ameliorate investors' mispricing the stocks. First, pure underpricing and reversal are significantly less (more) pronounced for post-mandate (pre-mandate) IPO stocks. In contrast, consistent with the cheap talk hypothesis, the pre-mandate voluntary forecasters (non-forecasters) appear to be more (less) underpriced. Second, the duration of underpricing for the post-mandate (pre-mandate) IPOs appears to be shorter (longer). Nevertheless, underpricing lasted relatively longer (shorter) for the pre-mandate IPOs with (with no) voluntary disclosures.