How Did the Elimination of the Window Guidance Policy Affect IPO Performance in China? A Stochastic Dominance Analysis

ABSTRACT

This study uses data on all initial public offerings (IPO) listed on the three boards in China’s stock markets to investigate overpricing in the Chinese IPO market from 2009 to 2013, which was the only period during which the “window guidance” policy was suspended in China. We use stochastic dominance tests to compare IPO performance to that of corresponding market indexes and to test whether the policy change addresses earlier problems of underpricing. The results indicate that the Chinese IPO market is extremely overpriced, and on average IPOs perform worse than the secondary market, which implies that investors who invest in newly listed IPOs have a higher likelihood of losing money than they would by investing in the secondary market.

KEY WORDS:

• IPO performance
• IPO reform
• stochastic dominance

JEL:

• G18
• G32

Acknowledgments

This study is sponsored by the National Natural Science Foundation of China (grants 71773025 and 71532004), the New Century Talents of Ministry of Education (grant NCET-13–0167), the Heilongjiang Postdoctoral Special Fund (grant LBH-TZ0508), and the fundamental Research Funds for the Central Universities (grant HIT.BRETIII.201408).

Supplementary Material

Supplemental data for this article can be accessed on the publisher’s website

Notes

1. Many studies have revealed that, by 180 days after listing, investors’ excessive optimism fades (Ljungqvist, Nanda, and Singh 2006; Yung, Çolak, and Wang 2008).

2. The ChiNext Board opened in 2009, so we explain the differences discussing only the Main and SME Boards.

3. The deduction of the BD test is available online in the Supplementary Material.

Additional information

Funding

This work was supported by the National Natural Science Foundation of China [71,532,004,71,773,025]; Heilongjiang Postdoctoral Special Fund [LBH-TZ0508]; New Century Talents of Ministry of Education [NCET-13-0167]; Fundamental Research Funds for the Central Universities [HIT.BRETIII.201408].