Prospect Theory and IPO Returns in China

31 Pages Posted: 12 Jun 2017

See all articles by Zhiqiang Wang

Zhiqiang Wang

Xiamen University

Bingbai Su

Xiamen University - School of Management

Jerry Coakley

University of Essex - Essex Business School

Zhe Shen

Xiamen University

Multiple version iconThere are 2 versions of this paper

Date Written: January 10, 2017

Abstract

This paper investigates whether prospect theory (PT) or a preference for lottery-like gains on stocks can explain the peculiarities of IPO returns in China. Chinese IPOs offer investors two potential lottery-like gains. One is potentially huge first day returns as Chinese issuers leave more money on the table and the other is that a particular IPO may in the long run become the next Alibaba. Consistent with the skewness preference hypothesis, we find that expected skewness is associated with high first-day returns and low long-term performance for a sample of 748 book-built Chinese IPOs issued over the 2005-2012 period. A one-standard-deviation increase in the expected skewness of an IPO stock can not only lead to an increase of 6.67 percentage points in the first-day return but also predict a decrease of 10.80-12.23 percentage points in the post-IPO abnormal return. Further analysis suggests that retail demand around the IPO event tends to increase with expected skewness, indicating that PT investors indeed overweight those extremely low probability events, leading to high first-day returns and low long-term abnormal returns.

Keywords: Skewness, IPO, Retail Demand, First-Day Return, Long-Term Performance

JEL Classification: G32

Suggested Citation

Wang, Zhiqiang and Su, Bingbai and Coakley, Jerry and Shen, Zhe, Prospect Theory and IPO Returns in China (January 10, 2017). Available at SSRN: https://ssrn.com/abstract=2984220 or http://dx.doi.org/10.2139/ssrn.2984220

Zhiqiang Wang

Xiamen University ( email )

Xiamen, Fujian 361005
China

Bingbai Su

Xiamen University - School of Management ( email )

No.422 Siming Nan Road
Xiamen, Fujian 361005
China

Jerry Coakley

University of Essex - Essex Business School ( email )

Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom
+44 1206 872455 (Phone)
+44 1206 873429 (Fax)

HOME PAGE: http://www.essex.ac.uk/afm/staff/coakley.shtm

Zhe Shen (Contact Author)

Xiamen University ( email )

School of Management
422 Siming South Road
Xiamen, Fujian 361005
China

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