The Winner's Curse and Lottery-Allocated IPOs in China
35 Pages Posted: 3 Mar 2007
Date Written: February 2007
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.
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