Short-Run Under Pricing and its Characteristics in Chinese IPO Markets

Jing Chi () and Carol Padgett ()
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Jing Chi: ICMA Centre, University of Reading
Carol Padgett: ICMA Centre, University of Reading

ICMA Centre Discussion Papers in Finance from Henley Business School, University of Reading

Abstract: We study the short-run performance of the Chinese privatization initial public offerings (PIPOs), using data of 668 new issues on the both Shanghai and Shenzhen Stock Exchanges from 1 January 1996 through 31 December 2000. We find that the average market-adjusted initial returns on the 1st, 5th, 10th, and 20th trading days are 129.16%, 126.93%, 126.93% and 124.95%. We use cross-sectional analysis to explain the extraordinarily severe underpricing of Chinese IPOs, and find the IPO underpricing is primarily explained by the high demand, caused by the quota system, and the high proportion of uninformed individual investors. Estimation results show that the Information Asymmetry Hypothesis explains the underpricing in the Chinese IPO markets well, while the Signaling Hypothesis does not. In terms of the government behaviour, the government does not send signals to the market on the quality of the issuers by underpricing, but it does capture the market opportunities to time IPOs to get the best market feedback on IPOs. In addition, government ownership has a negative impact on the underpricing, which shows that privatization is welcomed by the investors.

Keywords: Initial public offerings: Underpricing: Quota System: Asymmetric information: signaling; china (search for similar items in EconPapers)
JEL-codes: G15 G32 P21 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2002-11, Revised 2002-07
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Published in Research in International Business and Finance March 2005, 19:1, 71-93

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