Underpricing and Aftermarket Liquidity: An Empirical Exploration of Hong Kong IPOs

Abstract

This study evaluates the implications of three of the extant IPO models relating underpricing and aftermarket liquidity. Using hand collected data from a sample of bookbuilt Hong Kong IPOs, this study tests the predictions of the aforementioned models by evaluating not only the direction and sign of the theorized relation between underpricing and aftermarket liquidity, but also the role played by the shareholder base and information environment factors suspected of shaping this relation. The public availability of bid and allocation data in the Hong Kong Stock Exchange has made it possible to conduct such an in-depth evaluation of these models, an undertaking not yet attempted by prior empirical research. Test results show little support for models that posit that aftermarket liquidity and liquidity risk are responsible for higher underpricing. In contrast, I find strong support for models that conceive observed underpricing as a significant driver of post-IPO liquidity.

Keywords: IPOs, bookbuilding, underpricing, aftermarket liquidity

JEL Classification: G12, G14, G15, G18, G24