What Can We Learn from IPO Comparables Besides Valuation? IPO Shadow Stocks, Oversubscription Rates and Investor Sentiment in the Hong Kong Market

Abstract

IPO comparable stocks that are discussed by the local media around the IPO filing period are known in Hong Kong as IPO shadow stocks. I show that IPO shadow stocks experience significant price run-ups during the IPO filing period of the public offering tranche. The level of run-ups is positively associated with the level of media coverage of IPO stocks before the IPO filing date. Utilizing a unique dataset that provides information on IPO subscription rates, I find that higher run-ups of IPO shadow stocks are associated with higher IPO demand. The subscription rate is highly relevant in explaining IPO initial returns, and its presence overshadows most other factors commonly studied in the literature, such as prior market and industry returns. I further examine whether both the price run-up and oversubscription are due to leakage of information from institutional subscribers' demand (information diffusion hypothesis), or stimulated attention by over-optimistic investors in hot issue markets (stimulated attention hypothesis). In my empirical analysis, I find significant price reversals of IPO shadow stocks after the IPO listing dates. Further, the price run-ups of IPO shadow stocks of smaller firms and those subject to more severe short sale constraints have stronger predictive power for IPO demand. These results support the stimulated attention hypothesis and are inconsistent with the information diffusion hypothesis, suggesting that investor sentiment may be the dominant determinant of IPO demand in the Hong Kong market.