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Conflicts of Interest and China's A- Share Underpricing

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Abstract

The extremely high A- share under-pricing in China’s primary market provides us with a very interesting area of empirical research. Previous studies on China’s IPO underpricing have been suggestive, but in-conclusive. A significant decline in A- share underpricing is found in 2003 relative to previous years (and much less than that recorded in the literature to date). We examine the validity of previous A- share underpricing models, reported in the literature, and find a statistically significant structural break in the data during 2003 when these models are specified. We further explore conflicts of interest in the Chinese IPO market and specify an alternative model to further examine this change in observed market behaviour. Our results suggest that a contract with high underwriter’s fee leads to less A- share underpricing. Our results also suggest that the asymmetric information hypothesis does not apply in the Chinese IPO market in 2003. Overpricing by the secondary market and the trading activity on the first trading day are the main functions of the A- share underpricing. This study has important implications such as guiding the Chinese government policy regarding the regulations of Initial Public Offering.

Suggested Citation

  • Gerard Gannon & Yuwei Zhou, 2007. "Conflicts of Interest and China's A- Share Underpricing," Working Papers 2007_09, Deakin University, Department of Economics.
    • Handle: RePEc:dkn:acctwp:aef_2007_09
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    File URL: http://www.deakin.edu.au/buslaw/aef/workingpapers/papers/2007_09aef.pdf
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    More about this item

    Keywords

    Chinese IPO; Underpricing; Regulation;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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