Abstract
We study the cross-section pattern of underpricing of Chinese initial public offerings (IPOs), using data of 308 firm-commitment new issues from January 1, 1987 through December 31, 1995. We find that the cross-section pattern of underpricing can be explained in terms of a separating equilibrium under asymmetric information in which underpricing is a strategy for firms to signal their value to investors. The firms subsequently recoup the costs of underpricing when they go back to the market with seasoned equity offerings. We also investigate the claim that IPO underpricing is primarily explainable as a means of bribing bureaucrats and the hypothesis that various lottery mechanisms for allocation of IPO shares have exacerbated underpricing. Finally, we find that differences in initial returns between A and B shares can be explained by the differences in domestic and foreign investors' investment opportunities and investment sentiments.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Disclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.