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

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  • Jing Chi

    ()
    (ICMA Centre, University of Reading)

  • Dr. Carol Padgett

    ()
    (ICMA Centre, University of Reading)

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    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.

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    File URL: http://www.icmacentre.ac.uk/pdf/discussion/DP2001-12.pdf
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    Bibliographic Info

    Paper provided by Henley Business School, Reading University in its series ICMA Centre Discussion Papers in Finance with number icma-dp2001-12.

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    Length: 38 pages
    Date of creation: Nov 2002
    Date of revision: Jul 2002
    Publication status: Published in Research in International Business and Finance March 2005, 19:1, 71-93
    Handle: RePEc:rdg:icmadp:icma-dp2001-12

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    Web page: http://www.henley.reading.ac.uk/
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    Related research

    Keywords: Initial public offerings: Underpricing: Quota System: Asymmetric information: signaling; china;

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    References

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    1. Ljungqvist, Alexander P., 1997. "Pricing initial public offerings: Further evidence from Germany," European Economic Review, Elsevier, vol. 41(7), pages 1309-1320, July.
    2. Su, Dongwei & Fleisher, Belton M., 1999. "An empirical investigation of underpricing in Chinese IPOs," Pacific-Basin Finance Journal, Elsevier, vol. 7(2), pages 173-202, May.
    3. Ritter, Jay R, 1984. "The "Hot Issue" Market of 1980," The Journal of Business, University of Chicago Press, vol. 57(2), pages 215-40, April.
    4. Paudyal, K. & Saadouni, B. & Briston, R. J., 1998. "Privatisation initial public offerings in Malaysia: Initial premium and long-term performance," Pacific-Basin Finance Journal, Elsevier, vol. 6(5), pages 427-451, November.
    5. Mok, Henry M. K. & Hui, Y. V., 1998. "Underpricing and aftermarket performance of IPOs in Shanghai, China," Pacific-Basin Finance Journal, Elsevier, vol. 6(5), pages 453-474, November.
    6. Allen, Franklin & Faulhaber, Gerald R., 1989. "Signalling by underpricing in the IPO market," Journal of Financial Economics, Elsevier, vol. 23(2), pages 303-323, August.
    7. Ritter, Jay R, 1991. " The Long-run Performance of Initial Public Offerings," Journal of Finance, American Finance Association, vol. 46(1), pages 3-27, March.
    8. 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 02-85, Wharton School Rodney L. White Center for Financial Research.
    9. Koh, Francis & Walter, Terry, 1989. "A direct test of Rock's model of the pricing of unseasoned issues," Journal of Financial Economics, Elsevier, vol. 23(2), pages 251-272, August.
    10. Ibbotson, Roger G., 1975. "Price performance of common stock new issues," Journal of Financial Economics, Elsevier, vol. 2(3), pages 235-272, September.
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