Under-pricing and long-run performance of IPOs in China

Abstract

We examine the under-pricing and long-run performance of 230 A-share IPOs issued from 1997 to 1998 in China using comparable firm multiples. We find that the A-share IPOs are severely under-priced and under-valued by about 50% by issuers and underwriters at the offer. We also find positive relationship between magnitudes of under-valuation and initial return of IPO, thereby implying that under-valuation may cause under-pricing. In contrast with under-valuation by issuers and underwriters, investors tend to over-valuate IPOs on the listing day. This may indicate that under-valuation by issuers and underwriters and over-valuation by investors jointly causes the severe under-pricing of IPOs. Furthermore, we detect a 30% out-performance of IPOs with respect to the market after 36 months of listing. But IPOs under-perform their matching firms by 25% after 36 months of listing, and those IPOs over-valued by investors on the listing day under-perform those under-valued IPOs in the long-run.