Investment Banks’ Entry into New IPO Markets and IPO Underpricing

Abstract

We examine investment banks’ strategic entry and market share gain in the new China H-share IPO (HIPO) market since 1993. Investment banks would have the incentive in initial years to obtain the HIPO business by low balling, i.e., providing high offer prices to the issuer, leading to a lower underpricing and leaving less money on the table, so as to learn and gain expertise on China companies and business and build their superior information. Consistent with this argument we find that compared to Hong Kong company IPOs, investment banks who handle many HIPOs on average underprice HIPOs much less. The lower underpricing of HIPOs is driven by the first few HIPO deals and HIPOs handled during the initial period (i.e. 1993-2000). In later years (2001-2007) these same investment banks underprice HIPOs in a similar way compared to that of HKIPOs. We also find that the syndicate size of investment banks who handle many HIPOs is smaller than other investment banks handling HIPOs. These results suggest that investment banks initially lowball to gain expertise, and build up their superior information on China business.