Political economy of IPO underpricing: the evidence from China

Abstract

This paper looks at the IPO underpricing puzzle in a political economy perspective, as previous theories have considered only the ‘market economy factor’ in IPO underpricing, and failed to incorporate the ‘political economy factor’ in determining IPO underpricing. This is particularly relevant to emerging markets such as China, where the IPO is not only a process of raising fresh capital, but also one of privatisation. By examining the Chinese case with the political economy perspective, we find that the IPO underpricing is negatively related to the proportion of the shares held by various government organisations. We also offer explanations using an angle of political economy.

Keywords:

• political economy
• initial public offering
• privatisation

JEL Classifications:

• G32
• G38

Notes

1. The focus of the Jones et al. (1999) paper was on governmental behaviour in privatisation programmes around the world, and was thus more macro-oriented than the current study.

2. Defined as the difference between the first-day market closing price minus the IPO price divided by the IPO price.

3. Both studies report a negative relation between IPO return and firm size. Similar results are also reported by Su and Fleisher (1999) for China.

4. SOSshare is significant, at least at the 1% level, in both two regressions.