Document Type

Journal Article

Department/Unit

Department of Finance and Decision Sciences

Title

How regulatory changes affect IPO underpricing in China

Language

English

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.

Keywords

China, IPO, Regulatory change

Publication Date

2009

Source Publication Title

China Economic Review

Volume

20

Issue

4

Start Page

692

End Page

702

Publisher

Elsevier

DOI

10.1016/j.chieco.2009.05.007

ISSN (print)

1043951X

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