What causes the IPO underpricing? New evidence from China’s SME market

ABSTRACT

We study 10-year IPO initial returns in China’s small and medium-sized enterprise (SME) board between 2006 and 2016, including 755 IPO samples. At the same time, we test how policy changes of IPO pricing and trading mechanism affect first-day initial returns. Our article adopts the stochastic frontier approach to estimate the fair value of IPOs and decompose the components of deliberate underpricing and mis-valuation factors, then using linear regressions investigate correlation between first-day initial returns and deliberate underpricing or mis-valuation factors. We find it is mis-valuation factors, especially, the irrational behaviour of individual investors that mainly cause the IPO underpricing in China’s SME market rather than deliberate underpricing. Besides, influenced by IPO pricing policies, the characteristic of IPO pricing varies from period to period.

KEYWORDS:

• Initial public offering
• initial returns
• underpricing
• mis-valuation

JEL CLASSIFICATION:

• G15
• G24

Disclosure statement

No potential conflict of interest was reported by the authors.

Additional information

Funding

This work is supported by the National Natural Science Foundation of China (71471130, 71532009, 71320107003) and (2014ZD13); Core Projects in Tianjin Education Bureaus Social Science Program [2014ZD13].