Alternative explanations of under-pricing of Chinese initial public offerings

Yuan, Jie (2009) Alternative explanations of under-pricing of Chinese initial public offerings. PhD thesis, University of Nottingham.

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Abstract

The thesis contains an empirical study designed to reveal why initial public offerings (IPO) of common stocks (A-share) in China are on average under-priced from alternative angles as opposed to more established theories, using a dataset of 880 IPOs from January 1996 to December 2003.

A much higher degree of under-pricing compared to developed markets and even other emerging markets is a distinct feature of China’s A-share IPOs. Previous literatures based on classical hypotheses have not been able to fully explain such high level of under-pricing. Hence, alternative explanations have been put forward by academics as well as practitioner. It is said that the Chinese government has big influences in China’s primary market through tightly controlled issuing system and opaque regulatory constraints. People speculate that such influences have been both intentionally and unintentionally exerted, causing IPO under-pricing. A major contribution of the thesis is to test some new hypotheses based on three untested statements in China’s IPO literatures i.e. speculation effect, “Western Region Development” policy effect and government protection effect, which are all associated with government direct or indirect influences. More specifically, speculation effect hypotheses assume that the government constraints and regulator drawbacks have caused high level of speculation, which in turn drives the IPO under-pricing. “Western Region Development” policy effect hypotheses claim that government intentionally uses IPO under-pricing to lure investments into less developed and thus less favourable western region companies. Government protection effect hypotheses conjecture that IPO under-pricing is a compensation for investors’ concern of potential government interference in the government-protected firms. The thesis finds that speculation effect hypothesis is largely supported by empirical data while the other two are not.

The thesis has also re-tested hypotheses advanced in previous literatures including classical information asymmetry hypotheses, ex ante uncertainty hypotheses, investors’ behaviour hypotheses as well as existing China-specific hypothesis such as listing time lag hypothesis. Proxies such as government retention rate that have emerged in privatisation IPO literatures are also borrowed by Chinese researchers looking into China-specific institutional settings such as dominant government control. The thesis finds that information asymmetry hypotheses in general show more strength in explaining China’s IPO under-pricing while empirical evidence for other hypotheses are either mixed or weak. In the end, the thesis finds that alternative angles emerging from the tests of the three statements combined with some classical hypotheses supported by empirical data have a greater power to explain China’s high IPO under-pricing.

The so-called “floatation game” hypothesis has been put forward by researchers such as Tian (2003) who claims that the Chinese government makes use of IPOs with different lengths of IPO listing time lag i.e. the time lag between IPO announcement date and actual listing date to adjust the equity market cycle. In other words, the government let go public the IPOs with longer listing time lag thus more likely higher initial returns in the bear market and vice versa. The thesis does not find support to the “floatation game” hypothesis, although the thesis does find that the market cycle is closely related to the IPO under-pricing and the number of IPOs issued.

Item Type:Thesis (PhD)
Supervisors:Reber, B
Berry, R.H.
Faculties/Schools:UK Campuses > Faculty of Social Sciences, Law and Education > Nottingham University Business School
ID Code:820
Deposited By:Mr Jie Yuan
Deposited On:07 Oct 2009 13:13
Last Modified:14 Sep 2011 10:37

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