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

Author

Listed:
  • Jing Chi

    () (ICMA Centre, University of Reading)

  • Dr. Carol Padgett

    () (ICMA Centre, University of Reading)

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.

Suggested Citation

  • Jing Chi & Dr. Carol Padgett, 2002. "Short-Run Under Pricing and its Characteristics in Chinese IPO Markets," ICMA Centre Discussion Papers in Finance icma-dp2001-12, Henley Business School, Reading University, revised Jul 2002.
  • Handle: RePEc:rdg:icmadp:icma-dp2001-12
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    File URL: http://www.icmacentre.ac.uk/pdf/discussion/DP2001-12.pdf
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    References listed on IDEAS

    as
    1. 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.
    2. Ritter, Jay R, 1984. "The "Hot Issue" Market of 1980," The Journal of Business, University of Chicago Press, vol. 57(2), pages 215-240, April.
    3. 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.
    4. Ibbotson, Roger G., 1975. "Price performance of common stock new issues," Journal of Financial Economics, Elsevier, vol. 2(3), pages 235-272, September.
    5. 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.
    6. 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.
    7. Beatty, Randolph P. & Ritter, Jay R., 1986. "Investment banking, reputation, and the underpricing of initial public offerings," Journal of Financial Economics, Elsevier, vol. 15(1-2), pages 213-232.
    8. Ljungqvist, Alexander P., 1997. "Pricing initial public offerings: Further evidence from Germany," European Economic Review, Elsevier, vol. 41(7), pages 1309-1320, July.
    9. 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.
    10. Wolfgang Aussenegg, 2000. "Privatization versus Private Sector Initial Public Offerings in Poland," Multinational Finance Journal, Multinational Finance Journal, vol. 4(1-2), pages 69-99, March-Jun.
    11. 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.
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    More about this item

    Keywords

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

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • P21 - Economic Systems - - Socialist Systems and Transition Economies - - - Planning, Coordination, and Reform

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