Initial Day Return and Underpricing Cost in Advance Payment Initial Public Offerings
Hong Kong represents the second largest of the initial public offering (IPO) markets that adopt an advance payment subscription procedure. The lengthy process creates substantial financing costs to investors but interest earnings to issuers. Data from a sample of 386 IPOs listed between 2000 and 2007 reveals that interest cost can reduce the return to public subscribers by 44%; while the HIBOR-based interest earnings to issuers are estimated at 0.59% of funds raised, and at 6.27% of forecast earnings. Consistent with Agarwal, Liu, and Rhee (2008), the realized subscription rate strongly influences returns but the link weakens at higher interest rates. Interest earnings and underpricing are highly correlated, a finding in support of Chowdhry and Sherman¡¦s (1996) proposition. However, the proposition is deemed irrefutable as both underpricing and interest earnings are highly related to the subscription rate. Moreover, regression results show that the relationship between the subscription rate and offer price of H-shares and red-chips are indistinguishable from other issues. These results cast doubt on the common conjecture that the management of China-related enterprises are more likely to underprice their offerings than the managers of other enterprises. The higher returns to H-shares and red-chips can be attributable to the higher public demand for large issues.
|Date of creation:||Dec 2009|
|Contact details of provider:|| Postal: 55th Floor , Two International Finance Centre , 8 Finance Street , Central, Hong Kong|
Phone: (852)2878 1978
Fax: (852)2878 7006
Web page: http://www.hkimr.org
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Fung, Joseph K. W. & Cheng, Louis T. W. & Chan, Kam C., 2004. "The impact of the costs of subscription on measured IPO returns: the case of Asia," Journal of Corporate Finance, Elsevier, vol. 10(3), pages 459-465, June.
- Habib, Michel A & Ljungqvist, Alexander P, 2001.
"Underpricing and Entrepreneurial Wealth Losses in IPOs: Theory and Evidence,"
Review of Financial Studies,
Society for Financial Studies, vol. 14(2), pages 433-458.
- Michel Habib & Alexander Ljungqvist, 1999. "Underpricing and Entrepreneurial Wealth Losses in IPOs: Theory and Evidence," OFRC Working Papers Series 1999fe03, Oxford Financial Research Centre.
- Chowdhry, Bhagwan & Sherman, Ann, 1996. "International differences in oversubscription and underpricing of IPOs," Journal of Corporate Finance, Elsevier, vol. 2(4), pages 359-381, July.
- Agarwal, Sumit & Liu, Chunlin & Rhee, S. Ghon, 2008. "Investor demand for IPOs and aftermarket performance: Evidence from the Hong Kong stock market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 18(2), pages 176-190, April.
- Ravi Jagannathan & Ann E. Sherman, 2006. "Why Do IPO Auctions Fail?," NBER Working Papers 12151, National Bureau of Economic Research, Inc.
- Leung, Jeffery & Menyah, Kojo, 2006. "Issuer-oriented underpricing costs in initial public offers: Evidence from Hong Kong," Journal of Corporate Finance, Elsevier, vol. 12(5), pages 897-905, December.
- McGuinness, P., 1993. "Investor- and issuer-related perspectives of IPO underpricing," Omega, Elsevier, vol. 21(3), pages 377-392, May.
- Cheng, Louis T.W. & Chan, Kam C. & Mak, Billy S.C., 2005. "Strategic share allocation and underpricings of IPOs in Hong Kong," International Business Review, Elsevier, vol. 14(1), pages 41-59, February.
- Rock, Kevin, 1986. "Why new issues are underpriced," Journal of Financial Economics, Elsevier, vol. 15(1-2), pages 187-212.
- Carey, Peter & Steen, Adam, 2006. "Changing conditions in the Hong Kong new issues market," Pacific-Basin Finance Journal, Elsevier, vol. 14(5), pages 484-500, November.
- Henry M.K. Mok & Sandy S.M. Chau, 2003. "Corporate Performance of Mixed Enterprises," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 30(3-4), pages 513-538.
- Cheung, Yan-Leung & Liu, Yang, 2007. "IPO price performance and block-trading activities: Evidence from Hong Kong," Pacific-Basin Finance Journal, Elsevier, vol. 15(3), pages 276-291, June.
When requesting a correction, please mention this item's handle: RePEc:hkm:wpaper:352009. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (HKIMR)
If references are entirely missing, you can add them using this form.