Underpricing and the Long-Term Performance of Chinese Initial Public Offerings

Abstract

The purpose of this study is to examine the level of initial returns and long-term performance of A-series initial public offerings in China’s stock markets. The data used for this purpose cover 131 initial public offerings issued in either Shanghai (SHSE) or in Shenzhen (SHZE) stock exchange, during 2010–2012. This quantity of initial public offerings accounts for 12,04 % of all issued IPOs in research years.

Examination of initial returns is completed with market-adjusted returns, in order to find the development of underpricing phenomena. Market-adjusted buy-and-hold period returns and wealth relatives are used in researching the holding period returns of 6-, 12-, 24- and 36-month. Market-adjusted holding period returns are tested with Student’s t-test in order to define their statistical significance. Regression analyses are used in testing the statistical significance and explanatory power of firm specific characteristics.

The empirical results of this study are unable to editorialize to the level of initial returns, as the results are in contradiction with previous studies. Instead, the results about the long-term performance of initial public offerings indicate them to be poor long-term investments, as those underperformed their benchmarks: SSE & SSH composite indices. Cross-sectional regression results indicate that there is a strong positive relationship between price-to-earnings ratio and long-term performance. Furthermore, a strong negative relationship between market-adjusted initial returns and long-term performance is documented in this empirical research.