What Comprises IPO Initial Returns: Evidence from the Chinese Market
Posted: 30 Apr 2010
Date Written: December 12, 2009
Abstract
We studied the IPO price and long-term performance in China after the adoption of the book-building pricing mechanism. Using comparable firm value, we separated the IPO initial returns into pre-market deliberate underpricing and aftermarket overpricing. This separation enables us to clearly test different theories regarding high IPO initial returns. We find little evidence supporting the classic information theory on IPO underpricing but strong evidence supporting the behavioral arguments regarding IPO overpricing. Even though the results are specific to the Chinese market, we find some general results on what composes and drives IPO initial returns that have been lacking in the IPO literature.
Keywords: IPOs, Underpricing, Behavioral finance, China’s stock markets
JEL Classification: G12, G14, G15
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