Extreme Underpricing: Determinants of Chinese Ipo Initial Returns

31 Pages Posted: 21 Mar 2006

See all articles by Lihui Tian

Lihui Tian

Nankai University; University of London; Peking University - Department of Finance

William L. Megginson

University of Oklahoma

Date Written: March 15, 2007


The average underpricing of Chinese IPOs is 267 percent, the highest of any major world market. Using a sample of 1,124 IPOs listed on the Shanghai and Shenzhen Stock Exchanges between 1991 and 2000, we examine empirically the determinants of this extreme level of underpricing. We find it is caused partly by very high investment risks, of the type documented in many other markets, but mostly results from uniquely Chinese regulatory risks and costs. The government regulator sets a cap on pricing IPO shares and stipulates IPO allocation quotas to control the supply of IPO shares. There is also a very long time gap (34 day median, 305 days average) between going public and the actual listing of shares for trading, causing high lockup risk. Investors in China's primary market also discount IPO shares for extreme tunneling and grabbing risks, since these high initial returns benefit governmental political and financial interests and maximize the private benefits of key social elites.

Keywords: IPO Underpricing, Regulation, Investment Risks, Privatizations, Corporate Governance

JEL Classification: G23, G28

Suggested Citation

Tian, George Lihui and Megginson, William L., Extreme Underpricing: Determinants of Chinese Ipo Initial Returns (March 15, 2007). Available at SSRN: https://ssrn.com/abstract=891042 or http://dx.doi.org/10.2139/ssrn.891042

George Lihui Tian

Nankai University ( email )

Tianjin, 300071

University of London ( email )

Exhibition Road
London, WC1E 7HU
United Kingdom

Peking University - Department of Finance ( email )

No. 38 Xueyuan Road
Haidian District
Beijing, Beijing 100871
+86 10 6275 7900 (Phone)
+86 10 6275 14763 (Fax)

William L. Megginson (Contact Author)

University of Oklahoma ( email )

307 W Brooks, 205A Adams Hall
Norman, OK 73019
United States
(405) 325-2058 (Phone)
(405) 325-1957 (Fax)

HOME PAGE: http://faculty-staff.ou.edu/M/William.L.Megginson-

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