On China's A-share Initial Public Offering Underpricing Empirical Research

Initial public offering (IPO) underpricing—a large positive gain of a new issue immediately after flotation—is a recurring phenomenon in many markets. A number of theories of IPO underpricing have been put forward since 1970s and tested against the data of various stock markets. In recent years attention has been focused on China, because Chinese IPOs enjoy the world's highest initial returns. Economic conditions and institutional framework in China differ significantly from those in the US and other counties. The conclusions from previous body of IPO research cannot be automatically imputed to China.This paper reviews the relative theories of IPO underpricing from three points of view, expounding the background, main points and the evidence of each theory. At the same time, we sort out the documents based on Chinese IPOs, and analyze the characteristics of Chinese initial public offering market. Then we find the limitations of existing study and summarize how to choose data and hypotheses.In this paper, I choose eleven attributes to examine the underpricing of IPOs in the PRC, which are the odds of winning the lottery, the debt to all assets in the pre-listing year, the earnings per share in the pre-listing year, the operation cash flow per share in the pre-listing year, the capital raised in IPOs, the percentage of shares owned by the government and government-owned companies, the feature of belonging to a high-tech industry, the time gap between going public and going for listing, the capital raised in SEO within three years after IPOs, the feature of consignment-in by the 13 most reputable underwriters and the turnover rate on first trading day. The sample used in this study comprises 315 companies, which issued their A-shares from 1 January 2001 to 31 December 2005. We find that the average market-adjusted initial returns is high in our country, and we also find the lower odds of winning the lottery, the larger percentage of shares owned by the government and government-owned companies and the higher turnover rate on first trading day, and compare with previous study, the debt to all assets in the pre-listing year becomes larger and the time gap between going public and going for listing becomes shorter. Then we use a cross-sectional analysis to explain the severe underpricing of Chinese IPOs, and find that IPO underpricing is primarily explained by the speculative bubble, and the high demand caused by the quota system, the Ex-ante Uncertainty Hypothesis and Underwriter Reputation Hypothesis also fit well, while the Signaling Hypothesis dose not, the issuer does not send signal to the market on the quality of the company by underpricing. In terms of government behavior, the government dose capture the market opportunities to time IPOs in the hot issue periods to get the best market feedback on new offerings. At last, the investors in our market are mostly uninformed investors, and they are short of skills and experience.