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Deep underpricing of China's IPOs: sources and implications


  • Vinay Datar
  • David Z. Mao


The empirical findings of this paper suggest that IPOs in the Chinese stock market were deliberately, substantially underpriced by the issuers rather than overpriced by the aftermarket. We propose that the Chinese government has deliberately underpriced the IPOs primarily to create a viable capital market without any particular regard to maximisation of issue proceeds (or minimisation of underpricing). The implications of these findings for Chinese policy makers and local as well as foreign investors are significant. The high level of underpricing leads to a wealth transfer but it can be rationalised as an investment in building a capital market infrastructure. There is evidence suggesting that the issuer prefers to keep the offer price low regardless of the offer size; presumably this makes the issues accessible to a wider clientele and thereby makes the wealth transfer more equitable. The combination of a high level of underpricing and a small offer price makes the IPOs widely desirable and also widely affordable; this makes the potential wealth transfer equitable and also facilitates a wide dispersion of ownership that may be essential for a huge emerging capital market such as that of China.

Suggested Citation

  • Vinay Datar & David Z. Mao, 2006. "Deep underpricing of China's IPOs: sources and implications," International Journal of Financial Services Management, Inderscience Enterprises Ltd, vol. 1(2/3), pages 345-362.
  • Handle: RePEc:ids:ijfsmg:v:1:y:2006:i:2/3:p:345-362

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    Cited by:

    1. Nibu Raj Abraham, 2015. "Underpricing in the Malaysian IPO Market During 2009-2014," Journal of Applied Management and Investments, Department of Business Administration and Corporate Security, International Humanitarian University, vol. 4(4), pages 194-200, November.
    2. Brooks, Raymond M. & Mathew, Prem G. & Yang, J. Jimmy, 2014. "When-issued trading in the Indian IPO market," Journal of Financial Markets, Elsevier, vol. 19(C), pages 170-196.


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