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Offline Oversubscription, Issue Size, and Market Momentum: The Driving Forces for ChiNext IPOs’ Initial Underpricing

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  • Qi Deng
  • Zhong-guo Zhou

Abstract

This paper reexamines the driving forces for the first day initial return for ChiNext IPOs. We start from screening 29 potential explanatory variables, 4 policy break dummies, and 2 intraday trading suspension dummies, using an OLS model with dimension reduction techniques to identify significant variables. We then apply a 2SLS procedure to remove endogeneity without losing any important information. With the variables identified from the 2SLS model, we further apply a GARCH-M model with an ARMA(1,1) adjustment in the residuals to correct possible autocorrelation in the regression residuals and cross-correlation between the initial return and its conditional return variance. We find that the model fits the data well. From a number of potential factors in pricing Chinese IPOs, we identify three factors that drive the initial underpricing of ChiNext IPOs: the pre-issue share allocation multiplier from institutional investors (offline oversubscription), issue size (size effect), and the listing day stock market condition (market momentum). We estimate the contribution to the initial underpricing from each of the significant variables.

Suggested Citation

  • Qi Deng & Zhong-guo Zhou, 2015. "Offline Oversubscription, Issue Size, and Market Momentum: The Driving Forces for ChiNext IPOs’ Initial Underpricing," Chinese Economy, Taylor & Francis Journals, vol. 48(2), pages 114-129, March.
    • Handle: RePEc:mes:chinec:v:48:y:2015:i:2:p:114-129
    DOI: 10.1080/10971475.2015.993217
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    Cited by:

    1. Qi Deng & Lunge Dai & Zixin Yang & Zhong-guo Zhou & Monica Hussein & Dingyi Chen & Mick Swartz, 2022. "The Impact of Regulation Regime Changes on ChiNext IPOs: Effects of 2013 and 2020 Reforms on Pricing and Overreaction," Papers 2212.11779, arXiv.org.
    2. Deng, Qi & Dai, Lunge & Yang, Zixin & Zhou, Zhong-Guo & Hussein, Monica & Chen, Dingyi & Swartz, Mick, 2023. "The impacts of regulation regime changes on ChiNext IPOs: Effects of 2013 and 2020 reforms on initial return, fair value and overreaction," International Review of Financial Analysis, Elsevier, vol. 89(C).
    3. Deng, Qi & Zhou, Zhong-guo, 2016. "Overreaction in ChiNext IPOs' initial returns: How much and what caused it?," Emerging Markets Review, Elsevier, vol. 29(C), pages 82-103.
    4. Monica Hussein & Zhong-guo Zhou & Qi Deng, 2020. "Does risk disclosure in prospectus matter in ChiNext IPOs’ initial underpricing?," Review of Quantitative Finance and Accounting, Springer, vol. 54(3), pages 957-979, April.

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