China's A-share Market Ipo Short/long Term Market Performance And Its Relationship With Management Surplus Forecast

Initial Public Offering (IPO) is when a company (called the issuer) issues common stock or shares to the public for the first time. IPO occupies an important position among various market activities because it is the bridge connecting the primary and secondary market. Around IPO event, many scholars research the stock performance in very short term-one day (underpricing or initial return) and also some scholars research the long term-1 year,2-year and 3-year period (BHAR). Foreign researches indicate the phenomenon of underpricing and long-term underperformance exists in foreign countries but Chinese researches indicate that underpricing exists in China but the long-term abnormal return is not consistent. This article researches the China A-share IPO performance (1997-2006) of 1 day to 10 days/20 days/3 months and to 1 year/2 years/3 years and also relates the IPO performance to earnings forecast information (whether earnings forecast is issued and forecast error) and also relates IPO short-term/long-term performance to underpricing ratio. Below are the main findings. (1) Underpricing exists in China A-share market for all IPOs, forecaster and non-forecaster; Forecasters (137.79%) outperform non-forecasters (88.56%) significantly; under voluntary disclosure policy, the IPOs who issue earnings forecast in their prospectus (forecasters) have lower underpricing ratio than the ones who do not (non-forecasters); underpricing ratio is positively related to book-to-market ratio, and negatively related to IPO gross proceeds and waiting time to be listed (interval between issuing and listing). (2) Short-term (10 days/20 days/3 months) underperformance exists for all IPOs, forecaster and non-forecaster (except forecaster’s 3-month return); forecasters outperform non-forecasters significantly (-1.67%vs.-3.41% for 10 days,-1.90% vs.-4.84% for 20 days,-1.06% vs.-8.43% for 3 months); multiple regression analysis tells that short-term performance is negatively related to IPO underpricing ratio and gross proceeds and positively related to book-to-market ratio. However this performance is not influenced by whether to forecast earnings after controlling other variables. (3) Long-term (1 year/2 years/3 years) underperformance is criticized. All IPOs on average only show significant underperformance in 1-year period (-5.89%) and no significant abnormal performance exists in 2-year and 3-year term. Forecasters show significant overperformance in 1-year (5.77%),2-year (12.36%) and 3-year term (8.36%). Non-forecasters show significant underperformance in 1-year (-23.75%) and 2-year period (-14.99%) but no significant abnormal return in 3 years. Forecasters outperform non-forecasters significantly (overperformance is 29.52%,27.34% and 27.07% for 1 year,2 years and 3 years). After controlling other variables, Long-term performance is negatively related to IPO underpricing ratio (2 years), positively related to gross proceeds (1 year) and not influenced by whether to forecast earnings or not. Within accurate forecasters, forecast error does not influence long-term performance; within inaccurate forecasters, forecast error does influence long-term performance in the same direction (positive relationship).