An Empirical Investigation of Underpricing in Chinese Ipos

32 Pages Posted: 24 Mar 1997

See all articles by Dongwei Su

Dongwei Su

Jinan University - Finance Department

Belton M. Fleisher

Ohio State University (OSU) - Economics; IZA Institute of Labor Economics

Multiple version iconThere are 2 versions of this paper

Date Written: January 24, 1997


In this paper, we empirically identify some of the causes of cross-sectional differences in underpricing of Chinese initial public offerings (IPOs) using data compiled for 308 firm-commitment A-share IPOs (available only to Chinese investors) and 57 B-share IPOs (available only to foreign investors). We first formulate and estimate a benchmark empirical model that relates IPO initial returns to variables widely used in studies of IPO underpricing. Then we test three hypotheses that may help explain the high A- share IPO underpricing in China. We find that IPO underpricing is the largest at the earliest stage of development of stock markets in China. The extraordinarily large IPO underpricing is at least partially due to a relatively small aggregate supply of shares. We also find that A-share IPO underpricing is better explained by a signaling model that relates IPO underpricing to subsequent seasoned equity offerings (SEOs) than by one linking government or employee ownership to equilibrium IPO underpricing. Issuers with larger IPO underpricing are more likely to raise larger amounts of capital through SEOs more quickly. The results support the notion that the primary purpose for Chinese firms going public is to raise capital, not to transfer ownership from state to private citizens. Moreover, we do not find any evidence that lottery mechanisms have contributed to the high IPO underpricing in China. Finally, we find some evidence that the difference in IPO underpricing among A and B shares can be explained by the differences in domestic and foreign investors' investment opportunities and investment sentiments.

JEL Classification: G10, G30, O53

Suggested Citation

Su, Dongwei and Fleisher, Belton M., An Empirical Investigation of Underpricing in Chinese Ipos (January 24, 1997). Available at SSRN: or

Dongwei Su (Contact Author)

Jinan University - Finance Department ( email )

Department of Finance
Jinan University
Guangzhou, Guangdong 510632

Belton M. Fleisher

Ohio State University (OSU) - Economics ( email )

410 Arps Hall
1945 N. High St.
Columbus, OH 43210-1172
United States
614-292-6429 (Phone)
614-292-3906 (Fax)


IZA Institute of Labor Economics

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