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Investor participation and underpricing in lottery-allocated Chinese IPOs

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  • Shen, Zhe
  • Coakley, Jerry
  • Instefjord, Norvald

Abstract

We examine the association between IPO underpricing and investor participation using a unique sample of 411 Chinese IPOs where the offer price is not influenced by the issuers and underwriters, and allocation to subscribers is by a lottery mechanism. We find that investor participation does not increase with the profitability or liquidity of new issues contrary to the rational participation and liquidity hypotheses. However, consistent with the price bubbles hypothesis, we find robust evidence that initial returns and investor participation are positively related and that initial returns are inversely related with the three-year risk-adjusted abnormal return following IPOs. The implication is that excess demand inflated initial trading prices and exacerbated the Chinese “underpricing” phenomenon during our 1996–2000 sample period.

Suggested Citation

  • Shen, Zhe & Coakley, Jerry & Instefjord, Norvald, 2013. "Investor participation and underpricing in lottery-allocated Chinese IPOs," Pacific-Basin Finance Journal, Elsevier, vol. 25(C), pages 294-314.
    • Handle: RePEc:eee:pacfin:v:25:y:2013:i:c:p:294-314
    DOI: 10.1016/j.pacfin.2013.10.002
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    Cited by:

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    4. Hu, Yi & Dai, Tiantian & Li, Yong & Mallick, Sushanta & Ning, Lutao & Zhu, Baohua, 2021. "Underwriter reputation and IPO underpricing: The role of institutional investors in the Chinese growth enterprise market," International Review of Financial Analysis, Elsevier, vol. 78(C).

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    More about this item

    Keywords

    Rational participation; Price bubbles; IPO underpricing;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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