Study On First-day Abnormal Returns Of Initial Public Offerings In China

It is a worldwide phenomenon that the issue price of initial public offerings (IPOs) is below the first-day trading price on the secondary market. From 1960s western economists began to study on this issue, and have developed theories as "Information Asymmetry Hypothesis" and others.Since China established its security market, the IPOs underpricing has been much higher than that of developed capital markets and becomes a kind of risk-free return. Though the stock issuing systems have been reformed for several times, IPOs underpricing never disappeared or reduced. In late 1990s, economists started to study IPO underpricing in China. It seems that IPOs underpricing in the A stock market can hardly be explained by western theories. Due to different data and methods adopted by domestic economists in their researches, they give inconsistent conclusions.This thesis focuses on IPOs underpricing in Chinese stock market. It is structured as follows:Chapter 1 reviews the theories and empirical study on IPOs underpricing. We include the underpricing offerings hypothesis based on the "Efficient Market Hypothesis", and the empirical researches made by domestic analysts for A stock market.Chapter 2 analyzes how the reforms on issuing systems influence the first-day abnormal returns. We examine the supervising, pricing system and issuing functions. We focus on the empirical study on the supervising system and pricing system. We conclude that there is no significant relation between reforms of the issuing systems and the abnormal returns on the first day.Chapter 3 discusses whether IPOs are underpriced in China. After comparison analysis, we find that the issue prices of IPOs are not underpriced but overpriced. Even so, the first-day returns on IPOs are high. We attribute the abnormal returns to huge excess of demand over supply caused by the authority's control on stock issuance. With the control system, the state-owned economies take priority in IPOs.Chapter 4 conducts an empirical study on how the secondary market affects the IPOs. Also, we develop a VAR model.Chapter 5 builds a multi-variable model to analyze the factors that affect the first-day abnormal returns after IPOs, and tests this model.Finally, chapter 6 includes conclusions and limitations of this study.