How regulatory changes affect IPO underpricing in China

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journal

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Author(s)

  • Yan-leung Cheung
  • Zhiwei OUYANG
  • Weiqiang TAN

Related Research Unit(s)

Detail(s)

Original languageEnglish
Pages (from-to)692-702
Journal / PublicationChina Economic Review
Volume20
Issue number4
Publication statusPublished - Dec 2009

Abstract

This paper examines the underpricing of IPOs in the Chinese A-share market during the period 1992-2006. Since its inception, the Chinese IPO market has transformed from a tightly-controlled system to a more market-oriented system. Reforms include the abolishment of listing quotas and fixed issue price determination; allowing for more market participation in IPO pricing. The regulatory changes of Chinese IPO market, though improving over time, actually are not monotonic. The regulatory framework started from over-restrictive to over-unrestrictive, then fine-tuned with additional restrictions. This study documents the regulatory reforms during the sample period and investigates how these regulatory changes affect IPO underpricing in China. During this period, we find that Chinese IPOs exhibit a huge underpricing. The size of the underpricing, however, decreases over the sample period. This study further finds that the IPO pricing method before the regulatory changes, which was based on a fixed P/E ratio pre-determined by the regulators, contributed significantly to the IPO underpricing in China. After adopting a series of regulatory reforms allowing underwriters discretion in the determination of issue price, this regulatory underpricing component vanishes. This study has policy implications in demonstrating the impacts of regulatory frameworks on IPO underpricing. © 2009 Elsevier Inc. All rights reserved.

Research Area(s)

  • China, IPO, Regulatory change

Citation Format(s)

How regulatory changes affect IPO underpricing in China. / Cheung, Yan-leung; OUYANG, Zhiwei; TAN, Weiqiang.

In: China Economic Review, Vol. 20, No. 4, 12.2009, p. 692-702.

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journal