The impacts of regulation regime changes on ChiNext IPOs: Effects of 2013 and 2020 reforms on initial return, fair value and overreaction

Abstract

The Chinese version of NASDAQ, ChiNext has gone through three time periods with two different regulation regimes (approval versus registration) and three sets of listing day trading restrictions (trading curbs, hard return caps, and no restrictions). We hypothesize that the initial return of an IPO contains the issuer's fair value proxied by the IPO's monthly return and the investors' overreaction proxied by its intramonth return. We separate the full sample into three non-overlapping periods based on different regulatory rules, apply the Stepwise technique to identify significant variables for the return measures, and use multivariate linear regressions to estimate the signs and magnitudes of the significant variables. We observe stark contrasts among the determinants of return measures under different regulation regimes. We find that IPO pricing is mainly demand-driven under the approval regime, but switches to value-driven under the registration regime. Our findings reveal a clear pattern of evolution in investors' behavior in response to the progression of regulations along three dimensions: 1) governing regulation regimes, 2) listing day trading restrictions, and 3) issuer profile. Our findings provide insights to the continued efforts in moving the Chinese IPO market towards a more market-oriented and transparent environment with higher pricing efficiency.