IPO underpricing in the Chinese A-share market: Winner’s curse and ex ante uncertainty

A large number of researches shows that Initial Public Offerings (IPOs) of common stocks are systematically priced at a discount to their initial trading price. The large underpricing magnitude in the Chinese IPO market has drawn much attention. In this paper, A-share initial public offerings (IPOs) were 36.6458% underpriced from 2010 to 2016. I consider two hypotheses might explain the IPO underpricing in Chinese primary market, namely winner’s curse and ex ante uncertainty. By examining the hypothesis and finding that there is a strong positive correlation between the market-adjusted returns that are required for new stock issues and the degree of ex ante uncertainty associated with the IPO. I conclude that the cross-section pattern of underpricing can be explained in terms of winner’s curse theory and ex ante uncertainty