An Empirical Analysis on the Underpricing of Chinese A-share IPOs

Abstract The Chinese stock exchange is naturally characterized by information asymmetry, inequality between the supply and demand of certain IPOs due to its relatively high economic uncertainty inherent from the previous privatization process. Meanwhile whether to adopt underwriter reputation as an explanatory factor for the IPO underpricing remains to be a controversial issue due to the immature underwriting system in China. This paper investigates the potential factors derived from the information asymmetry model, signaling model and the theory of inequality to analyze the underpricing of the Chinese A-share IPOs from January, 2000 to September, 2004. The initial return is discovered to be 84.14327%, which is in a rational level in comparison to the previous findings. In addition, the results of this investigation advocate that the initial return in this period is considerably influenced by information asymmetry and imbalance of supply and demand for IPOs. However, the signaling model is found to have little stochastic explanatory power for the level of IPO underpricing within the sample period. Furthermore, underwriter reputation is clarified to be of little significance to elaborate on the IPO underpricing in Chinese security market