Are IPOs Overpriced?Empirical Evidence From Chinese IPOs

This paper selects IPO firms listed in Shanghai and Shenzhen stock exchanges from January 2007 to December 2017 and use the price multiples model to study whether Chinese IPOs are undervalued or overvalued.On this basis,this paper analyzes the relationship between the IPO valuation,first-day returns and long-term performance.Compared with their matching firms,Chinese IPOs are significantly undervalued.The finding does not change after changing matching criterion and price multiples model.Besides,lead underwriter's discretionary allocation has a significant negative impact on the valuation of IPOs.First-day returns partially come from the undervaluation of IPOs,which is consistent with the traditional view of IPO underpricing theory.Undervaluation of IPOs also affected investor sentiment,which also leads to high first-day returns.Tests about long-term performance of IPOs show that IPOs do not underperform the market and the matching firms,whether we use equal-weighted or value-weighted and whatever kinds of market average returns we use.The finding is also consistent with the traditional view of IPO underpricing theory.