The Price Behavior Of A-share IPOs In China

The price behavior of IPOs refers to the movement of stock price from the offering to post-listing that covers a long period of time. Two anomalies exist in the process, namely, IPO underpricing and the long-run underperformance, which make the study of the price behavior of IPOs a popular one for several decades. However, it remains a"puzzle"yet to be solved till today.The significant price appreciation over the offering price in the first-day, in other words, IPO underpricing, brings a positive initial return to the primary market investors. The long-run underperformance captures the phenomena that the long-run stock performance after listing falls short of market average and comparable seasoned stocks. The underperformance relative to the market is more significant than to comparable seasoned stocks.Researchers in the past treated the IPO underpricing and the after-market performance as two separate topics. The efficient markets hypothesis (EMH) and information asymmetry were adopted as the analysis framework for the IPO underpricing, while the after-market performance constitutes a challenge to EMH. There being no doubt about the IPO underpricing, different theoretical explanations are offered but none of which is able to fully explain the phenomena. The controversy about the existence and explanation of the after-market performance is greater as it challenges the efficient markets hypothesis. I regard IPO underpricing and after-market performance as two interlinked stages in a systematic and dynamic process. Hence it requires a holistic approach. Questions concerning the key links in the process include: Does long-run after-market abnormal return exist? (or: is there an efficient first-day market?)Having considered after-market abnormal return, are IPOs underpriced?Having answered the question of the existence of the IPO underpricing, how to explain it?Implications of certain"Chinese characteristics"on IPO price behavior should be factored in as it helps to unveil the true process of A-share IPO price behavior and bring clarity to understanding and predicting directions and effects with respect to further improvements on those"characteristics". Important"Chinese characteristics"in the related literature include government regulation and equity division.The paper aims to give a systematic analysis of A-share IPO price performance with consideration of the"characteristics"in the A-share market; existing theories will be sorted out and developed; proposals on how to improve the pricing efficiency of A-shares will be made.The paper undertakes the following work and outcomes achieved include:1.The definition of the price behavior of IPOs and the significance of a systematic approach; A summary of the existing theories and a history of A-share IPOs; The identification of the research direction and content of the paper.2.Suggesting a systematic framework for the studies of the price behavior of IPOs that includes IPO underpricing, aftermarket performance and relevant parties'activities; With a thorough review of major or important literature worldwide structured according to the famework, putting forward three tentative models of IPOs'price behavior; Through a thorough review of literature home and abroad, attesting to the necessity and significance of a dynamic and systematic approach to the study of the price behavior of IPOs. A theoretical basis is laid down for the following research.3.An analysis and comparison of major models and measures of abnormal return; Defining the selection criteria of major parameters and results. The methodology and tools are identified for the following research.4.A comparatively complete description of the A-share IPOs (the completeness refers to the time span of samples, the classification of samples into sub-groups, and return measurements), the argument that the A-share price behavior of IPOs conforms with the third model, namely, a combination of underpricing and overreaction (or underreaction).5.Multiple cross-sectional and time-series regression analysis, with findings as:(1) The long-run abnormal return is neither incidental nor something that can be offset, or a issue limited to the small-caps only. Like IPO underpricing, it is prevalent across all cap sizes, all sectors and all time, and shows similar momentum with the secondary market. There appears a significant negative correlation between the IPO underpricing and the long-run abnormal return and it is established that the first-day price is inefficient and the study of IPO underpricing and the after-market performance should not be conducted independently of one another. The Fama-French regression result once again bears out the long-run underperformance of market-priced IPOs. The TSCS regression result demonstrates that after witnessing first-day overvaluation of market-priced IPOs, there's a gradual return to its fair value.(2) Although the initial return is mainly composed of primary market undervaluation, multiple regression of IPO underpricing shows that the variance comes from the secondary market. The efficient markets hypothesis and asymmetrical information which constitute the conventional theoretical framework fails to lend significant support to the signaling theory and the underwriter agency theory either statistically or economically, with the exception of the"winner's curse"theory, which may be supported by the subsample of market-priced IPOs. The questions with so-called"Chinese characteristics", namely, the complicated equity division structure and a prolonged lag between the offering and the listing do not offer any explanation to the IPO underpricing.(3) In terms of the relative price multipliers of the offering and the listing(especially the relative P/E ratio), IPO pricing at various stages demonstrate the ability of"learning", which means it is priced at a relatively stable discount, referencing the overall price multipliers in the secondary market and then quickly approaches around the market level once listed. It could be that big funds or institutional investors wield price-setting power in the double auction process in the secondary market. Hence the initial return is maintained at a"normal"level.6.An analysis and test that equity division did not add investment cost (offering price of new shares) to the negotiable shareholders or dampen the investment return (after-market performance) to them. I point out that equity division is not responsible for the pricing inefficiency in the A-share market; those that should include regulator's control on new issues offering, investors irrational demand, the inadequate market structure and regulatory oversight. The equity division reform cannot solve those problems automatically. I suggest that the proponents of paying considerations in the equity division reform should look elsewhere to justify their request, and put forward the future research direction of equity division reform.7.Suggestions on the research direction of the price behavior of IPOs in the future.The paper is innovative in the following ways:1 .It breaks down the barrier between the underpricing and the after-market performance in the conventional price behavior research of IPOs and adopts a systematic approach to the complete process of IPO price behavior. Three possible IPO price behavior models based on different hypotheses are put forward initially in an open mind instead of installing pre-set hypothesis. The result shows that the A-share IPO behavior cannot be fully explained by the asymmetric information model under the EMH framework alone, or by the behavioral finance theories, but by a combination of both. Proceeding from the listing price formation mechanism, follow-up research should penetrate into the micro market structure.2 .Multiple cross-section and time series regressions confirm that the A-share IPOs in the market-priced stage demonstrate initial overreaction and long-run underperforamance. The Fama-French three-factor regression done to the A-share IPO return is among pioneering attempts within China. So is the TSCS regression done to the IPO abnormal return; the paper's innovation includes the structure of model, the hypotheses proposed and the definition of variables.3 .In the regression analysis, there is no pre-set scope for independent variables. As many as possible proxies of various theories are used and then through stepwise regression truly significant independent variables emerge out of the lot. The whole process is completely fact-driven. The contribution of each independent variable to the adjusted R2 is used to determine the relative importance of each and every variable (and the theory it represents).4 .The much-hyped hypothesis of equity division pushing up the new share offering price, which lacks proof, is cautiously examined. This is a path-finding research; the complete analysis framework and the empirical model are developed independently. In sum, the paper establishes a complete IPO price behavior model including IPO underpricing and the after-market underperformance. On the level of theory, the paper integrates the related theories and analytical frameworks and develop them further; in practice, a large amount of empirical studies are done to China's A-share IPO prices, thus arriving at valuable conclusions. The paper is of great theoretical and practical significance to a proper understanding of the A-share IPO price behavior, factors that influence it and how to improve the IPO issueing efficiency and the pricing efficiency in the secondary market.