The Underpricing of Initial Public Offerings in the Chinese Tourism Industry

Abstract

This paper examines the underpricing of A-share initial public offerings (IPOs) in the Chinese tourism industry. Test results show that a very high level of underpricing exists. Specifically, the mean 1-day initial return for 25 tourism A-share IPOs covering the period 1993–2006 is 150%. Notably, underpricing still persists 1 year after the initial listing dates. Three information asymmetry-based hypotheses – winner's curse, ex ante uncertainty and signalling – are investigated as plausible causes for underpricing. The test results support both the winner's curse and the ex ante uncertainty hypotheses, suggesting that investors, despite the high level of underpricing, should expect to earn no more than a market-adjusted return in the amount of the risk-free rate. On the other hand, empirical evidence leads to the rejection of the signalling hypothesis. Therefore, investors in the Chinese tourism IPO market should not view underpricing as a signal for quality firms.