Chinese Cross-listing Firms IPO Underpricing: The Effect Of Exchange Location

This study examines the impacts of several firm specific, underwriting processand market level determinants of the China-headquartered firms’ cross-listingunderpricing level. The sample includes Chinese listings in the Chinese-A sharemarket, Hong Kong Stock Exchange and New York Stock Exchange during theperiod from1993to2012. The results indicate that China-A share listings will havesignificantly higher underpricing level compared to the same firms’ listings in HongKong and the US market. Firm specific factors like offering order, issuer’s asset atIPO and the number of underwriters in the syndicate will influence the underpricinglevel. The further tests show that the IPO location has a significant impact on the IPOunderpricing level after controlling factors including issuer’s asset at IPO, ROE of theyear prior to IPO, IPO size, order of offering, underwriter involvement, firm riskinessand state ownership. To explore more about what characteristics of the exchangelocation contribute to the level of the underpricing level, location dummies arerepresented by specific and detailed exchange level variables. It could be concludedthat exchanges with larger liquidity and more listed firms would have a lowerunderpricing level. Besides examining the original underpricing level, market riskadjusted underpricing level is also considered and same tests are conducted. Theconclusion is the same as what obtained based on the original underpricing level.The robustness tests support the conclusions mentioned previously anddemonstrate the persistency of the underpricing phenomenon for a longer term usingthe one week underpricing level, one month underpricing level and the Tobin’s Q ratio,while the location variables remain to have explanatory power. Moreover, there is nogreat discrepancy in underpricing level among industries and listing year.