The Impact of Financial Crises on IPO Underpricing in the Chinese Stock Market: A Comparative Analysis of the 2008 Financial Crisis and the COVID-19 Pandemic

Purpose – The purpose of this paper is to model the Chinese unique regulation changes with the supply-and-demand analytical framework and structure the relationship between initial public offerings (IPO) underpricing and institutional changes with the comparative static method. A well-functioning stock market is crucial to the transition into a market economy, but the Chinese stock market is somehow twisted with frequent government interventions, particularly the IPO market. Can the underpricing issue be mitigated in the changing institutional settings? Can the market-orientated incremental reform of regulations succeed in the Chinese stock market? Design/methodology/approach – The theoretical analysis confirms that IPO underpricing becomes relatively better with dynamic changes of relaxation of the approval and pricing systems. Collecting and examining the data of newly listed firms from 1993 to 2010, the influence of institutional changes on IPO underpricing with regressions, such as ordinary least square (OLS), bootstrap and two stage least square (2SLS) estimation methods was further empirically examined. Findings – The magnitude of the Chinese IPO underpricing during the past two decades is as high as 181.6 per cent on the average. The sizes of IPO underpricing significantly reduce with an increase in the issuing sizes and the ratios of price-earnings ratios. The dummy variables of government-approved regulations are negatively associated with IPO underpricing. The dummy variables of pricing regulations are positively related to IPO underpricing and the coefficients become smaller with newer regulations. Generally, the magnitude of the Chinese IPO underpricing decreases over time. Originality/value – This paper enriches the IPO literature by dynamically examining the effect of institutional changes on IPO underpricing in Chinese primary markets. We argue that institutional changes characterized by incremental marketization can help to alleviate extreme IPO underpricing and to promote financial development. The Chinese transition from the planning system to the market system in the IPO market will be a long and strenuous process, but it works.

PurposeBased on the textual-analyzed data covering 2148 IPO firms in China’s stock market during the 2007–2018 period, the authors’ purpose is to examine the influence of anti-takeover provision (ATP) adoption on initial public offerings (IPO) underpricing and identify the reducing effect of the former.Design/methodology/approachThe authors examine the sample consisting of Chinese A-share listed IPO firms between 2007 and 2018 from China Stock Market Accounting Research and Chinese Research Data Services, with ATP data collected from the IPO firm chapters. Specifically, the authors use text analysis to identify whether there are ATPs in the IPO firm chapters, as well as the number of ATPs. H1: IPO underpricing is less severe for firms adopting ATPs. H2: The effect of ATP adoption on IPO underpricing is more salient for firms in worse information environments.FindingsThe authors examine the influence of ATP adoption on IPO underpricing and identify the reducing effect of the former. This effect can be explained by the fact that adopting ATPs in IPO firm chapters can reduce information asymmetry to a large extent by helping external investors obtain more private information, which alleviates IPO underpricing. The authors also find that the reducing effect is more significant in the worsened information environment. Furthermore, the authors explore the influence of adopting ATPs on other IPO characteristics and find positive effects on IPO over-subscription, funds raised and trading activity and negative effects on listing fees.Originality/valueThis study mainly contributes to the literature from the following two aspects. First, the study enriches the literature about the influencing factors of IPO underpricing. Second, the study also enriches the literature about the economic consequences of ATP adoption. This study also has important policy implications. With the coming of the era of decentralized ownership in China’s capital market, ATP adoption has become more important and attracted more attention. Also, investors focus more on pricing efficiency. The findings in this paper provide a more comprehensive understanding of the relationship between ATP adoption and IPO underpricing.

Initial public offering (IPO) underpricing remains a puzzle after decades of investigation. The stock markets in emerging economies are attractive to international investors but their unique characteristics need to be examined. Chinese stock markets experienced much more significant IPO underpricing than most other stock markets in the world. This paper offers a two-period wealth maximum model to explain the strategic IPO underpricing by state owners. Given the fact that the entire IPO procedure, including IPO price, is regulated and controlled by state owners, we argue that state owners strategically underprice the IPO, because they care less about the IPO proceeds but more about the wealth gain after IPO. The empirical finding of a positive relationship between IPO underpricing and state ownership in Chinese stock market is consistent with the wealth maximization hypothesis of IPO pricing. The paper offers better understanding for IPO procedure of state-owned enterprises in emerging markets.

ABSTRACTThis paper analyses whether the extreme underpricing of initial public offerings (IPOs) in China has been alleviated by the split-share structure reform in 2005. As an external policy shock to IPO firms, this Reform was designed to convert non-tradable shares into tradable shares, with the potentials to restore the distorted supply–demand relationship of newly issued shares and reduce the information asymmetry in Chinese stock market. Analysing a sample of IPOs in China from 2000 to 2011, we find that the split-share structure reform significantly reduced the magnitude of IPO underpricing since 2005. It had different impacts on the IPO shares issued by state-owned enterprise (SOEs) and non-SOEs. While IPO shares issued by SOEs and non-SOEs had similar underpricing rates before the Reform, non-SOE IPOs show lower underpricing than those of SOEs after the Reform. Furthermore, compared with IPOs issued by SOEs controlled by the central government, those issued by local governments controlled SOEs are more underpriced after the Reform.

This study examines the impact of the Global Financial Crisis (GFC) on Initial Public Offering (IPO) underpricing in the context of an emerging market from January 2006 to December 2011. Models consist of hierarchical and dummy variable regressions have been evaluated. Our results show, firstly, by comparison between the pre-GFC, GFC and post-GFC periods, it can be observed that IPOs initial returns (offer-to-close) are generally lower due to the crisis. Secondly, IPO underpricing provides an average of 17–25% of initial returns in the pre-GFC period, 1–3% during GFC period, and 3–7% in the post-GFC period. Thirdly, the financial crisis does not act as a moderator that worsens the relationship between underpricing of IPO and oversubscription ratio. Lastly, this study dispels the notion that investors should totally shun IPO during crisis period as there are still positive initial returns among the new issues. To the authors’ knowledge, this is the first study on the impact of the GFC on IPO underpricing in Malaysia.

Purpose – Initial public offerings (IPOs) underpricing is a world-wide phenomenon in the stock market. It is generally explained with asymmetric information and risk. The purpose of this paper is to complement these traditional explanations with a theory where investors also worry about the after-market illiquidity that may result from asymmetric information after the IPO. Design/methodology/approach – The model blends such liquidity concerns with adverse selection and risk as motives for underpricing and liquidity. The model's predictions are supported by evidence for 798 French IPOs realized between 1995 and 2008. Using various measures of liquidity, the author finds that expected after-market liquidity and liquidity risk are important determinants of IPO underpricing. Findings – The author finds evidence that less liquid the aftermarket is expected to be, and the less predictable its liquidity, the larger will be the IPO underpricing. Practical implications – The study provides empirical evidence that shares outstanding and author IPO characteristics play a vital role on post-IPO liquidity. According to the results obtained, three IPO characteristics, that is, relative size, blockholder and underpricing of offering have an explanatory for the liquidity and trading activity of the shares outstanding. It should be noted that this explanatory power is much greater before isolating the market effect. Nevertheless, given the evidence to show that these operations are executed during upmarket periods when trading volume is high, the non-exclusion of the market effect may attribute these variables with more explanatory power than they actually possess. Be that as it may, even after eliminating the market effect, their explanatory capacity is still considerable. Originality/value – The author has found that underpricing is negatively related to the breadth of shareholders but positively related to institutional shareholders after the IPO. When a company is underpriced, it is likely, on average, to have a higher breadth of shareholder base and lower concentration of large outside investors.

Although the underpricing of initial public offerings (IPOs) has been well documented, the underpricing of foreign IPOs have received relatively little attention. In a comparative analysis of foreign and domestic IPOs in the U.S. market for the 1990‐1993 period, we find that for a matched sample, foreign IPOs are significantly more underpriced. Our results are consistent with the models developed by Rock (1986), Beatty and Ritter (1986), and Carter and Manaster (1990). Examination of the characteristics of foreign IPOs reveals that they are more likely to be larger in size, employ more prestigious underwriters and are much more likely to list on the New York Stock Exchange (NYSE).

It is believed that underpriced initial public offerings (IPOs) are undervalued. To empirically test this belief, the present study examines valuation of 292 Indian IPOs listed from 2004 to 2013. In this regard, three questions are posed: first, whether the valuation (P/E multiples) of the industry and comparable peer can explain valuation (‘offer price P/E’ multiple) of IPO firms; second, whether the IPOs are undervalued or overvalued in relation to industry peers; and third, whether the IPOs undervalued (overvalued) in relation to peers are underpriced (overpriced). The results suggest that industry and comparable peer valuations do explain IPO valuation. It was found that there are both undervalued and overvalued IPOs in India. However, IPOs can be underpriced regardless of whether they are undervalued or overvalued in relation to industry/peers. Therefore, retail investors should not consider all underpriced IPOs as undervalued and cheap. IPOs may be priced above industry and yet generate positive initial returns (be underpriced). The IPOs valued below the comparable peers can generate higher initial returns. Thus, the present study contributes in providing relation between pricing and valuation of IPOs in India using industry/peer benchmark provided in prospectus so that retail investors can take appropriate decision about subscribing for an IPO.

A firm’s capability of raising funding is closely related to its sustainable development. With a more efficient allocation of funding among the whole society, social resources will be better utilized. Initial Public Offering (IPO) can indeed be an effective means of raising capital for corporate ventures. Using 1069 firms which completed IPOs on Chinese stock exchanges between 1st January 2004 and 1st January 2013, we investigate the difference in IPO underpricing before and after the 2008 financial crisis. Based on OLS regression models, we find that the IPOs are less underpriced in the post-crisis period. We examine the moderating effects of firm size on the difference in IPO underpricing between pre- and post-crisis periods, finding that small firms experienced less IPO underpricing than large firms after the financial crisis. After applying different model specifications such as Robust and OProbit regressions, the results remain consistent. Our study contributes to understanding the dynamics and influences of the financial crisis on firms’ IPO cost from the perspective of information asymmetry.

PurposeThe purpose of this paper is to investigate the relationship between auditor industry differentiation (specialization) and the underpricing of initial public offerings (IPOs). The intention is to determine whether IPO firms – particularly those in the small firm segment of the market where information asymmetry is likely to be greatest – can benefit from significantly better IPO pricing by engaging the services of differentiated auditors.Design/methodology/approachThe paper examines a broad sample of initial public offerings made between 1991 and 2000. It also conducts univariate and multivariate tests to assess the relationship between IPO underpricing and auditor industry specialization.FindingsThe paper finds that IPOs audited by Big 6 firms experience significantly less underpricing than IPOs audited by non‐Big 6 firms, particularly among small clients. It also finds an additional (and significantly larger) reduction in underpricing when the client engages an auditor that has established itself as the clear leader in its industry.Research limitations/implicationsThe results in this paper may not be generalizable to different countries. They do, however, appear to be robust in the USA throughout the ten‐year sample period.Practical implicationsThe paper shows that it may not be feasible for all clients in the small‐firm segment of the market to engage specialist auditors. However, if they can, the results suggest that they could benefit from better IPO pricing.Originality/valueThe paper combines the auditor specialization literature with the IPO underpricing literature and also documents a significant economic benefit to smaller IPO firms.

The number of initial public offerings (IPOs) in the United States has been much lower since 2000 than in the preceding two decades, although there was a surge in IPO activity in 2021. The Securities and Exchange Commission (SEC) has attempted to reduce the regulatory and cost burdens of going public. Important new developments in the U.S. IPO market include confidential filings, testing the waters, direct listings, and special purpose acquisition companies (SPACs). Related research sheds light on whether the new developments can help capital formation and lower the costs of going public. Also relevant are the motives for going public, new insights into IPO pricing, institutional investors’ pre-IPO investments, and the consequences of firms’ IPO decisions. In the U.S., the majority of IPOs have used the bookbuilding mechanism, which involves generating and recording investors’ buying interests. Different companies prefer different mechanisms for going public. Bookbuilding is valuable for companies that face uncertainty regarding investor demand. A private firm may prefer selling itself to a publicly traded acquiring firm over an IPO in order to expand more quickly by utilizing the acquirer’s capital and established platform. A high-growth firm may prefer a merger with a SPAC over a traditional bookbuilt IPO due to the ability to use solid forecasts to increase the stock’s valuation. And companies with strong brand recognition or easy-to-understand business models, but no immediate cash needs, may find a direct listing more attractive, especially when their insiders have large diversification or liquidity needs. The SEC and other regulatory agencies should embrace and enhance these alternative mechanisms. Economies-of-scope considerations, globalization, regulatory and disclosure requirements, and the relative costs of public versus private capital all play a part in firms’ decisions to go public. Careful examinations of the benefits and costs are still needed. Possible widespread use of confidential filings and testing-the-waters communications after the regulatory changes initiated by the 2012 JOBS Act can substantially influence information production, IPO decisions, and IPO pricing. Private companies have increasingly used direct listings and SPAC mergers to go public, and emerging evidence suggests these methods will continue to evolve. Several recent papers have examined IPO underpricing across countries, and their findings are consistent with both information-asymmetry-based explanations and those based on issuer–underwriter conflicts. Information asymmetry helps explain the 7% average IPO underpricing in the U.S. during the 1980s. However, explanations based on agency problems, underwriter power, and issuer complacency are instructive for understanding the average underpricing of over 18% for all IPOs since then or over 50% for large subsets that can be identified ex ante. Future research would be useful to shed light on the predictability and magnitude of IPO underpricing, as well as on the effects of regulations and issuer–underwriter conflicts on underpricing. Recent research shows that IPOs have far-reaching effects. They not only influence the financing and investment policies of the issuing companies, but also have spillover effects to other companies, local communities, and labor markets.

The underpricing of initial public offerings (IPOs) in the Chinese market is higher than in other markets. This paper analyses both initial underpricing and long-run performance for Chinese IPOs in order to resolve arguments in previous Chinese IPOs literature studies. Using a sample of 275 Chinese IPOs from 2005 to 2008, the results support Rock’s (1986) winners’ curse and Welch’s (1992) cascades theory. The results of long-run performance report that Chinese IPOs underperform the market in two years time. More importantly, this paper finds that the underpricing of Chinese IPOs is mainly caused by the activities of investors in the secondary market.

Purpose- This research has both theoretical and practical implications. The study's findings will provide valuable insights into the impact of the COVID-19 pandemic on IPO mispricing in the Turkish IPO market. The study delves into the behavior of IPOs that were issued between 2010 and 2022, with a focus on how they were affected by the COVID-19 pandemic. The results may help investors and issuers understand the pandemic's effects on IPO pricing and inform their investment decisions. The study will also provide valuable insights to investors, regulators, and market participants, allowing them to make more informed decisions during market volatility and uncertainty periods. Methodology- The study involves employing two methods: the traditional ordinary least squares (OLS) and the more appropriate quantile regression (QR). The OLS method focuses on assessing the average impact of independent variables on mispricing, disregarding the unexplored latent characteristics of the mispricing distribution, especially when it deviates from a normal distribution. In contrast, the QR method allows us to investigate the diverse effects of independent variables at different levels of mispricing due to the asymmetric distribution of returns. By employing the QR approach, it can be identified the specific impacts of each variable on IPOs within particular levels of mispricing. This robust method is capable of handling potential heterogeneity in the distribution, which was observed in the sample. The QR method also facilitates the examination of various segments of the mispricing distribution, including the tail regions, enabling a comparison of the effects of explanatory factors on IPOs that range from extremely overpriced to extremely underpriced. Due to the constraints of the project, the paper has been done with a limited number of shares. Findings- The study investigates the impact of the COVID-19 pandemic on Initial Public Offering (IPO) mispricing in financial markets, examining changes in mispricing levels before, during, and after the pandemic. The results indicate a significant increase in IPO mispricing during the COVID-19 period, consistent with expectations due to factors such as heightened asymmetric information, reduced IPO volume, and decreased demand. The analysis tests the hypothesis that Covid-19 has a significant impact on IPO results. The results show that the null hypothesis (H0) cannot be rejected, supporting the notion that the pandemic has a substantial effect on IPO mispricing. This is particularly evident in equations examining 1-year returns. Furthermore, the study explores the influence of various factors on IPO mispricing, including stock market indices and dummy variables representing different years. While some index values are found to be insignificant, the Borsa Istanbul-All Index and dummy variables for 2020, 2021, and 2022 are significant in specific equations. Notably, the persistence of the impact of COVID-19 beyond the relevant period suggests a lasting effect on IPO mispricing. Examining sector-specific effects, the study finds that, based on first-day returns, all sector values, except for SEC 3 (Consumer Non-Cyclicals), are significant. However, for 1-year returns, only SEC 5 (Financials) and SEC 4 (Energy) exhibit significance, with the latter being slightly above the 10% limit. The increasing demand for energy companies in recent times is identified as a potential driver for higher levels of "IPO underpricing" in specific IPOs within these sectors. Conclusion- The study provides robust evidence of increased IPO mispricing during the COVID-19 pandemic, highlighting the persistent impact of the crisis on financial markets, as well as sector-specific nuances influencing mispricing levels. Keywords: IPOs (Initial Public Offerings), mispricing, pandemic, initial returns, long-term returns JEL Codes: C21, C23, D81, E44, G14

Purpose – Underpricing is one of the most important anomalies associated with initial public offerings (IPOs). The purpose of this paper is twofold; first, it examines the impact of underwriter’s market share and spread on the underpricing of IPOs; and second, it investigates the effect of management earnings forecasts bias and accuracy on the underpricing of IPOs. Design/methodology/approach – A sample of 190 Malaysian IPOs listing on the main market of Bursa Malaysia from January 1, 2002 to February 29, 2012 was used and collected data were analyzed through univariate analysis and pooled ordinary least squares regression. Findings – The empirical evidence shows that IPOs underwritten by underwriters as having high market share and charging low underwriting spread experience higher level of underpricing. The paper also finds that IPOs issued more biased earnings forecasts are related with severe underpricing. Finally, this paper reveals that the more accurate the earnings forecasts are, the more minimized will be the asymmetric information and hence, the less will be IPO underpricing. Practical implications – The paper has some implications for policy makers, investors and underwriters. First, this study offers some insights for policy makers who are responsible for Malaysian financial markets current reforms. Further, knowing the importance of the economic outcomes of the earnings forecasts on underpricing for policy makers, they may adopt the findings in their discussion of costs of litigation and potential modifications in the requirements of issuing earnings forecasts. For the investors, findings may improve their understanding of equity valuation and for the underwriters, it would assist them in identifying underwriting cost. Originality/value – This paper is considered the first study to extend IPO literature by investigating the relationships between underwriter’s market share, underwriter’s spread, earnings forecasts bias, earnings forecasts accuracy and IPO underpricing in an emerging country, such as Malaysia.

The initial public offering (IPO) is one of the most critical events in the lifetime of a young firm. Prior research has shown that firms tend to have successful IPOs if they go public with the endorsement of a prestigious lead underwriter. This paper examines the antecedents to receiving endorsement by a prestigious underwriter and links this to the experience base of a firm's upper echelon. We theorize that the amount and type of upper echelon experience serve as important symbols of a young firm's legitimacy to critical outsiders. We introduce a typology of upper echelon experience that distinguishes between upper echelon upstream, horizontal, and downstream employment-based affiliations and suggest that these different types of upper echelon affiliations allay different types of endorser concerns regarding firm legitimacy, affecting the endorsement process. Further, we theorize that the relationships between upper echelon experience and investment bank prestige will be moderated by technological uncertainty. We test our assertions on a comprehensive sample of public and private biotechnology firms that were founded between 1961 and 1994 and that went public between 1979 and 1996. Analyses of the five-year career histories of the over 3,200 executives and directors that make up the upper echelons of these firms show that firms with upper echelons with affiliations with prominent downstream organizations (i.e., pharmaceutical and/or healthcare companies) and with prominent horizontal organizations (i.e., biotechnology companies) are more likely to attract the endorsement of a prestigious investment bank. We also find that the greater the range of upper echelon affiliations across the categories of upstream, horizontal, and downstream affiliations, the more prestigious the firm's lead underwriter. We also find that these latter results are moderated by technological uncertainty. The present research has implications for the study of organizational legitimacy, interorganizational endorsements, and entrepreneurship.