The aftermarket performance of Chinese a share IPOs

Abstract

This study investigates the initial returns and the long run returns ( for up to 3 years) of 328 new issues listed on the Shanghai Stock Exchange and Shenzhen Stock Exchange from 1 January 1997 to 31 May 1999. The average market-adjusted initial return of our study sample is 135.44 percent, suggesting that the successful application of IPOs is nearly a sure way to make money in China. However, compared to other previous studies (especially those on the beginning period of Chinese stock market) on earlier period of Chinese stock market, the magnitude of initial returns has already reduced to some extent. This study also employs as many as 3 methodologies to evaluate the long run performance of IPOs. The 3-year buy-and-hold abnormal return study shows that the study sample on average overperforms the corresponding market index by 20.16 percent. After the cumulative abnormal return event method has been employed, the average 3 year cumulative return reduces to 12.09 percent. And the average 3-year cumulative abnormal return calendar analysis also reports 4.36 percent abnormal positive return compared to the market portfolio. The results of 3 methods all suggest the overperformance of Chinese A share IPOs. Meanwhile, this study confirms that the choice of measurement method to evaluate the long-run performance directly influences the magnitude of abnormal returns, as well as their statistical significances. To estimate IPO long run performance, the regression analysis examines the relationship between the IPO long run performance and some independent variables. And the result supports impresario hypothesis and windows of opportunity, but finds inapplicability of privatization theory and divergence opinions hypothesis. This study finds that IPOs going public before the Asian Financial Crisis perform worse than those after the crisis. The independent variable of manufacturing industry dummy is not good enough to explain the abnormal positive performance, but application method helps to predict the long run price behavior of Chinese A share IPOs. We also find that the choice of listing exchange (Shanghai Stock Exchange or Shenzhen Stock Exchange) for Chinese A share IPOs does not affect their long-run performance, i.e. stock portfolio in both exchanges face the same market risk.From the regression analysis, we found that the ones with smaller offering sizes, listing in a a??colda?? period, less popularity in application, and lower market adjusted initial returns are big winners in the long run.