What Causes the Underpricing of IPOs and the Long-Run Performance of Stocks?

23 Pages Posted: 31 Aug 2012  

Sazali Abidin

Lincoln University (NZ); University of Waikato - Department of Economics and Finance

Krishna Reddy

University of Waikato - Department of Economics and Finance

Yukun Zhu

University of Waikato

Date Written: August 30, 2012

Abstract

The underpricing of initial public offerings (IPOs) in the Chinese market is higher than in other markets. This paper analyses both initial underpricing and long-run performance for Chinese IPOs in order to resolve arguments in previous Chinese IPOs literature studies. Using a sample of 275 Chinese IPOs from 2005 to 2008, the results support Rock’s (1986) winners’ curse and Welch’s (1992) cascades theory. The results of long-run performance report that Chinese IPOs underperform the market in two years time. More importantly, this paper finds that the underpricing of Chinese IPOs is mainly caused by the activities of investors in the secondary market.

Keywords: Initial Public Offering (IPO), finance, investment, performance

JEL Classification: G15

Suggested Citation

Abidin, Sazali and Reddy, Krishna and Zhu, Yukun, What Causes the Underpricing of IPOs and the Long-Run Performance of Stocks? (August 30, 2012). Available at SSRN: https://ssrn.com/abstract=2139126 or http://dx.doi.org/10.2139/ssrn.2139126

Sazali Abidin (Contact Author)

Lincoln University (NZ) ( email )

PO Box 85084
Ellesmere Junction Road/Springs Road
Lincoln, 7647
New Zealand

University of Waikato - Department of Economics and Finance ( email )

Private Bag 3105
Hamilton, 3105
New Zealand

Krishna Reddy

University of Waikato - Department of Economics and Finance ( email )

Private Bag 3105
Hamilton, 3105
New Zealand

Yukun Zhu

University of Waikato ( email )

Te Raupapa
Private Bag 3105
Hamilton, 3240
New Zealand

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