| The large underpricing in the Chinese IPO market has attracted much research attention. We attempt to shed light on this issue by examining some classical models of IPO underpricing for the Chinese market. Using data from January 1997 to December 2002, our results show that the winner's curse hypothesis is the main reason for the high IPO underpricing in China. The signaling hypothesis does not stand in the Chinese market during the sample period. First of all, we briefly introduce the research status of IPO underpricing in our country and foreign countries, the degree of IPO underpricing in each country and the definition of underpricing in the first section. Much evidence suggests that initial public offerings (IPO) of common stocks are systematically priced at a discount to their subsequent trading price. The large underpricing magnitude in the Chinese IPO market has attracted much attention. Underpricing levels reported in the Chinese market are much higher than the average level of 60% in the emerging markets. For many markets, whether developed or emerging, IPO underpricing may be explained in terms of some classical IPO underpricing models such as asymmetric information models, the market feedback hypothesis, investment banker monophony power hypothesis and signaling model. The classical IPO underpricing models examined in this study are the winner's curse model and signaling model.In the second section,we summarize the winner's curse model and signaling model of the IPO underpricing. Asymmetric information model assumes that there are two groups of potential investors in the IPO markets:"informed"and "uninformed"investors. Informed investors bid only for attractively priced IPO; uninformed investors apply for every new issue coming into the market indiscriminately. Thus, the joint participation by both informed and uninformed investors in underpriced IPOs makes the demand for underpriced IPOs high, and allocation rate low. The hypothesis of the winner's curse model is IPO initial returns are inversely correlated with allocations to investors. Another key empirical implication of the winner's curse model is that underpricing should increase in the ex ante uncertainty surrounding an issue. The underpinning is that higher uncertainty leads to proportionally more informed investors, which deteriorates the winner's curse problem. The signaling model assumes that the issuer has better information on securities value than the underwriters or investors. Thus, underpricing may become a signal for firm quality. Under this assumption, good quality issuers sell a fraction of the firm at flotation and the remainder in a SEO. Therefore, the signaling model leads to the empirical predictions: Firms with more underpriced IPOs are more likely to issue seasoned equity than firms with less underpriced IPOs.In the third section, we introduce the sample data and the method we adopt to compute the initial return; and combining with the actual circumstance of Chinese stock market, put forward the test of the underpricing degree of Chinese IPOs. We achieve the results of underpricing of Chinese IPOs, and compare them with the results of other research. The sample used in this study comprises 384 companies which issued and listed their A-shares in Shanghai Stock Exchange from 1 January 1997 to 31 December 2002. The prices of the new issues at their launch and their price at the end of first day of trading are recorded. The daily prices are obtained from the StockStar database. The market-adjusted abnormal return for each IPO on the first day of trading is computed as: ()where is the price of the stock 'i' at the close of the first trading day, and is the offer price and is the total first-day return on the stock; is the market index value at the close of first trading day and is the market index value on the offer day of the appropriate stock, while is the first day's comparable market return. To test the hypothesis that, we compute the associated statistic:, where...
|
PDF Full Text Request