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The impact on performance of IPO allocation reform

Author

Listed:
  • Fei Jiang
  • Lawrence A. Leger

Abstract

Purpose - The purpose of this paper is to investigate the changes in initial public offering (IPO) underpricing and short‐run performance following a regulatory reform (No. 54 [2002] China Securities Regulatory Commission (CSRC)) of the method of allocating IPO shares in China. Design/methodology/approach - On 20 May 2002, the CSRC announced that IPO subscription and allotment would be based on the market value of investors' tradable shareholdings. Before the regulatory change, this was determined by the amount of funds used for subscription. The reform was intended to increase participation by both smaller and institutional investors. Based on a sample of 209 IPOs in the Shanghai A‐share market during the period 2001‐2003, the paper employs an event study methodology to examine the impact of this IPO regulatory reform. Findings - The paper finds that the overall (pre‐ and post‐reform) average abnormal initial return of 116.94 per cent is lower than in earlier studies of Chinese IPOs but higher than in other markets. Post‐reform underpricing decreases by 42.27 per cent compared to pre‐reform levels. In the post‐listing aftermarket a pre‐reform upward trend of cumulative abnormal returns was reversed to become downward post‐reform. The results suggest that the regulatory change has encouraged well‐informed investors, consistent with Information Cascades and Bandwagon hypotheses. It also appears that the reform improved market efficiency and secondary market liquidity. Originality/value - The findings shed light on the relationship between IPO costs, IPO pricing, market liquidity and market microstructure. They also have important implications for issuers, underwriters and in particular for policy markers.

Suggested Citation

  • Fei Jiang & Lawrence A. Leger, 2010. "The impact on performance of IPO allocation reform," Journal of Financial Economic Policy, Emerald Group Publishing Limited, vol. 2(3), pages 251-272, August.
    • Handle: RePEc:eme:jfeppp:v:2:y:2010:i:3:p:251-272
    DOI: 10.1108/17576381011085458
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    Cited by:

    1. Wang, Chao-Shi & Tang, Hui-Wen & Chen, Roger C.Y., 2017. "Does IPO subscription demand affect investor herd behavior in Taiwan?," International Review of Economics & Finance, Elsevier, vol. 51(C), pages 258-272.
    2. Fotis, Panagiotis & Pekka, Victoria & Polemis, Michael, 2015. "Intervalling-effect bias and evidences for competition policy," MPRA Paper 63211, University Library of Munich, Germany.
    3. Congsheng Wu, 2014. "Underpricing of homecoming A-share IPOs by Chinese firms already listed abroad," Review of Quantitative Finance and Accounting, Springer, vol. 43(3), pages 627-649, October.
    4. Chun Zhou & Wenyu Zhou & Jiajun Lu, 2021. "The Short-Term Impacts of the Registration-Based IPO Reform in China: Towards a More Sustainable Equity Market," Sustainability, MDPI, vol. 13(20), pages 1-17, October.

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