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The short-run price performance of initial public offerings in Hong Kong: New evidence

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  • Vong, Anna P.I.
  • Trigueiros, Duarte
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    Abstract

    The study examines the first day returns of over 480 initial public offerings (IPO) in Hong Kong during a 12-year period (1994-2005). Based on this set of observations the study builds a comprehensive model of the short-term price performance of new offerings, in the light of the existing theoretical hypotheses about IPO underpricing. Results show clear evidence of the signaling effect of underwriters' reputation. For a set of different conditions and time periods examined, the most sought after underwriters are consistently associated with less underpriced offerings. In addition, the study shows that offerings underwritten by two or more underwriters tend to be less underpriced and that underpricing may be a signal in its own right. The study also shows that the informed demand hypothesis of Rock (1986) is supported only where some specific circumstances are verified. Finally, results confirm the recent trend (in Hong Kong) towards a less aggressive underpricing.

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    Bibliographic Info

    Article provided by Elsevier in its journal Global Finance Journal.

    Volume (Year): 21 (2010)
    Issue (Month): 3 ()
    Pages: 253-261

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    Handle: RePEc:eee:glofin:v:21:y:2010:i:3:p:253-261

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    Web page: http://www.elsevier.com/locate/inca/620162

    Related research

    Keywords: Ex-ante uncertainty Initial public offerings Subscription rate Underpricing Underwriters' reputation;

    References

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    1. Wai-yan Cheng & Yan-Leung Cheung & Ka-kit Po, 2004. "A Note on the Intraday Patterns of Initial Public Offerings: Evidence from Hong Kong," Journal of Business Finance & Accounting, Wiley Blackwell, Wiley Blackwell, vol. 31(5-6), pages 837-860.
    2. Randolph P. Beatty & Jay R. Ritter, . "Investment Banking, Reputation and the Underpricing of Initial Public Offerings," Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research 2-85, Wharton School Rodney L. White Center for Financial Research.
    3. Beat Reber & Caroline Fong, 2006. "Explaining mispricing of initial public offerings in Singapore," Applied Financial Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 16(18), pages 1339-1353.
    4. Mark Grinblatt & Chuan Yang Hwang, . "Signalling and the Pricing of Unseasoned New Issues," Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research 1-89, Wharton School Rodney L. White Center for Financial Research.
    5. Shane A. Corwin & Paul Schultz, 2005. "The Role of IPO Underwriting Syndicates: Pricing, Information Production, and Underwriter Competition," Journal of Finance, American Finance Association, American Finance Association, vol. 60(1), pages 443-486, 02.
    6. Cheng, Louis T.W. & Chan, Kam C. & Mak, Billy S.C., 2005. "Strategic share allocation and underpricings of IPOs in Hong Kong," International Business Review, Elsevier, Elsevier, vol. 14(1), pages 41-59, February.
    7. Titman, Sheridan & Trueman, Brett, 1986. "Information quality and the valuation of new issues," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 8(2), pages 159-172, June.
    8. Carl R. Chen & Nancy J. Mohan, 2002. "Underwriter Spread, Underwriter Reputation, and IPO Underpricing: A Simultaneous Equation Analysis," Journal of Business Finance & Accounting, Wiley Blackwell, Wiley Blackwell, vol. 29(3&4), pages 521-540.
    9. Megginson, William L & Weiss, Kathleen A, 1991. " Venture Capitalist Certification in Initial Public Offerings," Journal of Finance, American Finance Association, American Finance Association, vol. 46(3), pages 879-903, July.
    10. L. Cassia & G. Giudici & S. Paleari & R. Redondi, 2004. "IPO underpricing in Italy," Applied Financial Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 14(3), pages 179-194.
    11. Richard B. Carter & Frederick H. Dark & Ajai K. Singh, 1998. "Underwriter Reputation, Initial Returns, and the Long-Run Performance of IPO Stocks," Journal of Finance, American Finance Association, American Finance Association, vol. 53(1), pages 285-311, 02.
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    13. Booth, James R. & Chua, Lena, 1996. "Ownership dispersion, costly information, and IPO underpricing," Journal of Financial Economics, Elsevier, Elsevier, vol. 41(2), pages 291-310, June.
    14. Loughran, Tim & Ritter, Jay R. & Rydqvist, Kristian, 1995. "Initial public offerings: International insights," Pacific-Basin Finance Journal, Elsevier, Elsevier, vol. 3(1), pages 139-140, May.
    15. Chen, Gongmeng & Firth, Michael & Krishnan, Gopal V., 2001. "Earnings forecast errors in IPO prospectuses and their associations with initial stock returns," Journal of Multinational Financial Management, Elsevier, Elsevier, vol. 11(2), pages 225-240, April.
    16. Booth, James R. & Smith, Richard II, 1986. "Capital raising, underwriting and the certification hypothesis," Journal of Financial Economics, Elsevier, Elsevier, vol. 15(1-2), pages 261-281.
    17. Anna Vong, 2006. "Rate of subscription and after-market volatility in Hong Kong IPOs," Applied Financial Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 16(16), pages 1217-1224.
    18. Lee, Philip J. & Taylor, Stephen L. & Walter, Terry S., 1996. "Expected and realised returns for Singaporean IPOs: Initial and long-run analysis," Pacific-Basin Finance Journal, Elsevier, Elsevier, vol. 4(2-3), pages 153-180, July.
    19. Rock, Kevin, 1986. "Why new issues are underpriced," Journal of Financial Economics, Elsevier, Elsevier, vol. 15(1-2), pages 187-212.
    20. Chien-Ting Lin & Shou-Ming Hsu, 2008. "Determinants of the initial IPO performance: evidence from Hong Kong and Taiwan," Applied Financial Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 18(12), pages 955-963.
    21. Grinblatt, Mark & Hwang, Chuan Yang, 1989. " Signalling and the Pricing of New Issues," Journal of Finance, American Finance Association, American Finance Association, vol. 44(2), pages 393-420, June.
    22. Neuberger, Brian M. & Hammond, Carl T., 1974. "A Study of Underwriters' Experience With Unseasoned New Issues," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 9(02), pages 165-177, March.
    23. Welch, Ivo, 1989. " Seasoned Offerings, Imitation Costs, and the Underpricing of Initial Public Offerings," Journal of Finance, American Finance Association, American Finance Association, vol. 44(2), pages 421-49, June.
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