TESTING FOR DELIBERATE UNDERPRICING IN THE IPO PREMARKET - A STOCHASTIC FRONTIER APPROACH

We reevaluate the IPO underpricing phenomenon using the stochastic fro ntier methodology. The advantage of the stochastic frontier is that it can be used to measure the level of deliberate underpricing in the pr emarket without using after-market information. This is accomplished t hrough the estimation of a systematic one-sided error term that measur es ''inefficiency'' or the difference between the maximum predicted of fer price and the actual offer price. Data for the analysis are compri sed of 1,035 IPOs of common stock: issued by firm commitment between 1 975 and 1984. IPOs appear to be deliberately underpriced in the premar ket in both hot-market and nonhot-market periods. Moreover, the determ inants of the maximum IPO price have different effects in the two time periods.