Short-Run Underpricing and its Characteristics in Chinese IPO Markets
ISMA Centre Finance Discussion Paper No. 2001-12
38 Pages Posted: 14 May 2002
Date Written: July 7, 2002
We study the short-run performance of Chinese privatization initial public offerings (PIPOs), using data on 668 new issues on both the Shanghai and Shenzhen Stock Exchanges from 1 January 1996 to 31 December 2000. We find that the average market-adjusted initial returns on the 1st, 5th, 10th, and 20th trading days are 129.16%, 126.93%, 126.93% and 124.95%. We use cross-sectional analysis to explain the extraordinarily severe underpricing of Chinese IPOs, and find that IPO underpricing is primarily explained by the high demand caused by the quota system, and the high proportion of uninformed individual investors. Estimation results show that the Information Asymmetry Hypothesis explains the underpricing in Chinese IPO markets well, while the Signalling Hypothesis does not. In terms of government behaviour, the government does not send signals to the market on the quality of the issuers by underpricing, but it does capture the market opportunities to time IPOS to get the best market feedback on offerings. In addition, government ownership has a negative impact on the underpricing, which shows that privatization is welcomed by investors.
Keywords: Initial public offerings, underpricing, quotal system, asymmetric information, signaling, China
JEL Classification: G32, G15, P21
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