Investment Banks’ Entry into New IPO Markets and IPO Underpricing

42 Pages Posted: 1 Jan 2011

See all articles by Simon Fung

Simon Fung

Deakin University

Ferdinand A. Gul

Monash University Sunway Campus

Suresh Radhakrishnan

JSOM, University of Texas at Dallas

Date Written: December 30, 2010

Abstract

We examine investment banks’ strategic entry and market share gain in the new China H-share IPO (HIPO) market since 1993. Investment banks would have the incentive in initial years to obtain the HIPO business by low balling, i.e., providing high offer prices to the issuer, leading to a lower underpricing and leaving less money on the table, so as to learn and gain expertise on China companies and business and build their superior information. Consistent with this argument we find that compared to Hong Kong company IPOs, investment banks who handle many HIPOs on average underprice HIPOs much less. The lower underpricing of HIPOs is driven by the first few HIPO deals and HIPOs handled during the initial period (i.e. 1993-2000). In later years (2001-2007) these same investment banks underprice HIPOs in a similar way compared to that of HKIPOs. We also find that the syndicate size of investment banks who handle many HIPOs is smaller than other investment banks handling HIPOs. These results suggest that investment banks initially lowball to gain expertise, and build up their superior information on China business.

Keywords: initial public offerings, underpricing, lowball, investment banks, agency problems, Hong Kong

JEL Classification: G12, G24, G32

Suggested Citation

Fung, Simon and Gul, Ferdinand A. and Radhakrishnan, Suresh, Investment Banks’ Entry into New IPO Markets and IPO Underpricing (December 30, 2010). Available at SSRN: https://ssrn.com/abstract=1732835 or http://dx.doi.org/10.2139/ssrn.1732835

Simon Fung (Contact Author)

Deakin University ( email )

221 Burwood Highway
Burwood, Victoria
Australia

Ferdinand A. Gul

Monash University Sunway Campus ( email )

Jalan Lagoon Selatan
Selangor Darul Ehsan
Bandar Sunway, 46150
Malaysia

Suresh Radhakrishnan

JSOM, University of Texas at Dallas ( email )

Mail Stop SM 41
800 West Campbell Road
Richardson, TX 75080
United States
972-883-4438 (Phone)
972-883-6811 (Fax)

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