Underpricing and aftermarket performance of IPOs in Shanghai, China

• Published in: Pacific-Basin finance journal Vol. 6; no. 5; pp. 453 - 474
• Main Authors: Mok, Henry M.K., Hui, Y.V.
• Format: Journal Article
• Language: English
• Published: Elsevier B.V 01-11-1998; Elsevier
• Series: Pacific-Basin Finance Journal
• Subjects: Aftermarket performance; IPO; Speculative bubble; Underpricing; Underpricing; IPO; Speculative bubble; Aftermarket performance; G39; G30
• ISSN: 0927-538X; 1879-0585
• DOI: 10.1016/S0927-538X(98)00023-7

A-share initial public offerings (IPOs) in Shanghai were 289% underpriced, against a mere 26% for B-share IPOs. Regression analysis suggests that the `Chinese characteristic' of high equity retention by the state, a long time-lag between offering and listing and ex-ante risk of new issues were key determinants of market-adjusted IPO underpricing. After controlling for the market comovements, infrequent trading and a higher risk for new issues, the excess returns of overpriced A-share IPOs and B-share IPOs persisted over a long period of time. Rather than being a speculative conjecture, this represents a
real phenomenon in that large excess returns accrue in the long run, albeit it meant less negative accumulated returns than the overall market, which had dropped sharply.