Initial Public Offerings Chinese Style

We examine various aspects of the IPO market in China—the policy history, IPO pricing, bids and allocation, and aftermarket trading under two lenses: IPO theories and the unique regulatory environment in China. We show that heavy-handed regulations cause inefficient IPO offer prices and high initial returns, resulting in a high cost of going public. Investors treat IPOs as lotteries with extreme short-term returns, with little attention to the long-term. The auction selling method, however, works in the way it is supposed to. Mutual funds bid more smartly than other investors, and their advantages are unlikely to be due to underwriters' preferential treatment. We also discuss the direction of future regulation reforms, including the latest Science and Technology Innovation Board, or STAR market