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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, University of Reading, revised Jul 2002.
    • Handle: RePEc:rdg:icmadp:icma-dp2001-12
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    References listed on IDEAS

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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 - Political Economy and Comparative Economic Systems - - Socialist and Transition Economies - - - Planning, Coordination, and Reform

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