TY - JOUR
T1 - How regulatory changes affect IPO underpricing in China
AU - Cheung, Stephen Y L
AU - Ouyang, Zhiwei
AU - Tan, Weiqiang
N1 - Copyright:
Copyright 2009 Elsevier B.V., All rights reserved.
PY - 2009/12
Y1 - 2009/12
N2 - 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.
AB - 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.
KW - China
KW - IPO
KW - Regulatory change
UR - http://www.scopus.com/inward/record.url?scp=70350053264&partnerID=8YFLogxK
U2 - 10.1016/j.chieco.2009.05.007
DO - 10.1016/j.chieco.2009.05.007
M3 - Journal article
AN - SCOPUS:70350053264
SN - 1043-951X
VL - 20
SP - 692
EP - 702
JO - China Economic Review
JF - China Economic Review
IS - 4
ER -