Regulated price and Demand in China’s IPO market

Abstract

We use simultaneous equations to model the bi-directional causality between IPO initial returns and oversubscription ratios in China. We find that the causality is one-directional from oversubscription ratios to IPO initial returns in the post-reform period (2005–2015), which is consistent with a demand effect. By contrast, a demand effect did not exist in the pre-reform period (1996–2004). Our findings suggest that the 2005 reform of the IPO pricing mechanism has allowed IPO prices to be determined by market forces in China.