The Winner's Curse and Lottery-Allocated IPOs in China

35 Pages Posted: 3 Mar 2007

See all articles by Norvald Instefjord

Norvald Instefjord

University of Essex - Essex Business School

Jerry Coakley

University of Essex - Essex Business School

Zhe Shen

University of Essex - Department of Accounting, Finance & Management

Date Written: February 2007

Abstract

This is the first study of Rock's (1986) winner's curse hypothesis in which over-subscribed IPOs are allocated by a pure lottery mechanism. It employs a unique dataset of 562 Chinese IPOs 1996-2001 which provides information for the estimation of allocation-weighted returns. The results provide much stronger support than hitherto for the winner's curse hypothesis. Allocations are inversely related to underpricing in line with adverse selection. Weighting by allocation dramatically reduces median abnormal returns more than 200-fold from 116% and uninformed investors earn a median return of just 0.51%. The winner's curse can explain underpricing in our sample of Chinese IPOs.

Suggested Citation

Instefjord, Norvald and Coakley, Jerry and Shen, Zhe, The Winner's Curse and Lottery-Allocated IPOs in China (February 2007). Available at SSRN: https://ssrn.com/abstract=967995 or http://dx.doi.org/10.2139/ssrn.967995

Norvald Instefjord (Contact Author)

University of Essex - Essex Business School ( email )

Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom

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

University of Essex - Department of Accounting, Finance & Management ( email )

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

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