Low-Price Effect: Evidence from the Chinese IPO Market
50 Pages Posted: 31 Mar 2018
Date Written: March 26, 2018
We document a strong low-price effect for Chinese initial public offerings (IPOs). Namely, IPOs with low offer prices have higher initial returns, followed by even stronger after-market performance. This low-price effect cannot be fully explained by risks and IPO undervaluation. A long-only secondary market trading strategy investing in low-price IPOs can beat the buy-and-hold market benchmark using several performance measures and under a wide range of parameter settings. Our findings suggest investor preference for low-priced stocks can be quite profitable in the Chinese IPO market as low-priced IPOs outperform initially and in after-market trading.
Keywords: Low-Price Effect, Initial Public Offering, Chinese Stock Market, Nominal Price Illusion, Investor Attention
JEL Classification: G02, G14, G15, G24
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