A direct test of the rock's model in the pricing of Hong Kong's IPOs

Abstract

The main objective of the paper is to test the Rock's (1986) model using 418 IPOs listed on the Hong Kong Stock Exchange (HKSE) during the period January 1988 to July 1998, representing 100% of the population during the period. The results confirm that the (i) the winner's curse is strongly evident, (ii) uninformed investors' returns are not statistically different from the risk-free rate, (iii) informed investors' responsiveness to subscription levels is much higher than that of the uninformed investors and (iv) those IPOs in which the overallotment option is exercised generate higher initial returns than those IPOs for which the overallotment options are not exercised . • However, there is one contradicting result in that the results show a positive correlation between the proportion applied for, the proportion allocated to the uninformed investors and the initial excess return, as opposed to a negative correlation as implied in the Rock's model.