Underpricing in Chinese IPOs–some recent evidence

Abstract

This article analyses the initial public offering (IPO) underpricing issue of 237 new A-shares from 2002 to 2004, shortly before the IPO suspension in the Chinese domestic market. The data set comes out with an initial return mean of 88.67%, an average market-adjusted initial return of 89.61% and an average market-adjusted log-return of 59.18%, which are significantly lower than the results of former empirical studies. This downward trend of IPO returns reinforces the explanation that a transition economy reduces its cheap state assets sell-off in line with the maturing of its capital market. Based on the results of correlation and regression analysis, we ascertain that the IPO underpricing is overwhelmingly caused by the excess demand and the generally positive sentiment in China's secondary/after-IPO market for new shares, resulting in high trading turnover on the first listing day. This is strengthened by the finding that more initial returns could be generated on the SHSE than on the SZSE, as a result of strong public interest in blue chip IPOs on the SHSE.

Notes

¹ Both H-shares and Red Chips are shares of China-backed companies issued on the Stock Exchange Hong Kong (SEHK). H-shares are issued by companies that are incorporated in mainland China; whereas Red Chips are issued by offshore Chinese enterprises incorporated outside mainland China, but owned at least 35% by Chinese state-owned organizations or by provincial or municipal authorities in mainland China.

² N shares are settled in the form of American Depository Receipt and traded on the New York Stock Exchange (NYSE) or on NASDAQ.

³ Since existing of B-shares in 1991, investors holding a foreign passport have been eligible to register as foreign investors. Thus, a certain part of B-shares, according to Fernald and Rogers (1998) 40% on the SHSE at that time, was owned by overseas Chinese or domestic residents who use various means to circumvent the legal barriers (Bergstörm and Tang, 2001).

⁴ Statistics were taken from URL http://www.csrc.org.cn (accessed on 7 May 2005).

⁵ Using Shanghai A Index and Shenzhen A Index respectively for IPO shares listed on the SHSE and SZSE.

⁶ Initial return here is defined as first trade price minus issue price divided by issue price.

⁷ We categorize the 24 securities companies that underwrote more than 4 IPOs as lead manager in the period 2002 to 2004 as top in the dummy variable ‘reputation of the lead manager’. These are China International Capital, CITI Securities, Southern Securities, Guotai Junan Securities, GF Securities, Huaxia Securities, Galaxy Securities, Ping An Securities, Xing Ye Securities, Huatai Securities, Xiangcai Securities, Everbright Securities, Guosen Securities, Haitong Securities, Tiantong Securities, Great Wall Securities, Merchants Securities, Hongyuan Securities, Changjiang Securities, Northeast Securities, Taiyang Securities, Huaan Securities, Guangdong Securities, Shenyin Wanguo Securities.

⁸ Note that the variable PUBLIC_U is constant within the data set without missing values.