The Impact of price limits on initial public offerings: evidence from the Taiwan stock exchange

Abstract

This paper is the first to examine the impact of price limits on IPOs. In essence, the impact can be categorized into underpricing, price discovery, volatility, and trading activity. Using the IPO data ( 1989-2000) from the Taiwan Stock Exchange, we find that the internationally comparable underpricing is 51.69% and, on average, it takes 6.24 days for IPOs to reach their equilibrium prices. The volatility spillover hypothesis, which states that price limits cause higher volatility levels on subsequent days, is supported by limit hits before the equilibrium price was reached, but it is rejected after the equilibrium price was reached. The trading interference hypothesis, which implies that trading activity will be intensified on the days following the limit-hit day, is supported by limit hits before the equilibrium price was reached, but it is only supported by the lower limit-hit IPOs after the equilibrium price was reached. Evidence also indicates that the impact of price limits on IPOs is more significant before the equilibrium price was reached than after that was reached from both the volatility and the trading activity perspectives.