REPUTATION AND HOME ADVANTAGE EFFECTS - THE CASE OF FOREIGN AND CHINESE UNDERWRITERS IN H-SHARES IPO

Abstract

This study investigates the underwriter reputation and home advantage effects on Hshares initial public offering (IPO) underpricing and long-run performance. The results show that after controlling for the risk and firm characteristics of the IPOs, there is evidence of reputation advantage possessed by top-tier foreign underwriters in Hong Kong, in the form of better long-run performance of IPOs they have underwritten. The home-advantage of mainland local investment banks is reflected in the significantly better performance of state-owned enterprise IPOs underwritten by market-leading mainland underwriters. The observation is consistent across two different measures of underwriter reputations. As the competition between foreign and mainland local investment bank heightens, the results of this paper shed light on the optimal certification role obtained through co-lead arrangements between top-tier foreign underwriters and mainland local underwriters with dominant market share. This will be of interest to policy-makers, firms, investors and other market participants.