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Explaining Chinese IPO underpricing based on information asymmetry

Xu, Lu (2013) Explaining Chinese IPO underpricing based on information asymmetry.

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Abstract:Many previous studies indicated the extremely high IPO underpricing existed in Chinese market, and their explanations are mixed. Researchers suggested many possible theories to explain this difference phenomenon, among them the information asymmetry theory was the most commonly used one. As time passed and market developed, we want to examine if the theory still suitable to explain Chinese IPO underpricing. Here in the study we measured the underpricing degree of 786 Chinese IPOs from 2006 to 2012 by Market-adjusted initial return. Our sample period experienced both hot issue market (2006-2007) and cold issue market (2008-2012), and the fixed pricing mechanism in pervious study is replaced by bookbuilding. We reviewed information asymmetry theory and employed several most related factors, by using an OLS regression to test if these factors have impacts on IPO underpricing degree. Our results show some differences from previous studies. We found that the winner's curse hypothesis can partly support the underpricing in Chinese IPO as the proportion of state-owned shares is positively related to underpricing. While for other commonly suggested factors such as duration time, underwriter and auditor reputation, and former retained ownership, our result cannot provide significant relationships. So we carefully reject the suggested hypotheses as they failed to explain the phenomenon. Furthermore, our result could contribute to companies' and investors' knowledge about the impact of non-financial factors on share pricing during IPO process.
Item Type:Essay (Master)
Faculty:BMS: Behavioural, Management and Social Sciences
Subject:85 business administration, organizational science
Programme:Business Administration MSc (60644)
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