What Causes the Underpricing of IPOs and the Long-Run Performance of Stocks?

Abstract

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.