Ipo underpricing in China's new stock markets

Abstract

China's recent economic reforms have included the privatization and listing of many state- owned enterprizes (SOEs). This study investigates the pricing of initial public offerings of A- shares sold to PRC citizens and B-shares sold to foreigners. Our data consist of 480 A-share

IPOs and 85 B-share IPOs that listed in the period 1992 to 1996. Initial returns on A-share IPOs average 327 percent while the underpricing of B-shares averages just 26 percent. We find that risk, in the form of the delay in listing after the issue of shares, and future equity offerings are strongly and positively associated with the underpricing of A-shares. In contrast, we cannot explain the cross-sectional differences in B-share underpricing. We find that two valuation multiples, the relative price to book ratio and the relative price to earnings ratio, are used by companies to signal market value and hence underpricing of A-shares. Our study gives some insights and some understanding of the pricing of new issues on the Shanghai and Shenzhen stock exchanges.