Initial Returns and Long-Term Performance of IPOs in China 2001–2011. Evidence on the Influence of the Institutional and Economic Context from the Shanghai Stock Exchange

In this article, we analyze initial public offerings on the Shanghai Stock Exchange (SSE) from 2001 to 2011 to investigate underpricing and long-term performance in the Chinese IPO market. Multi-linear OLS regressions are applied to 332 IPOs of A-shares for which the necessary data were extracted from the SSE factbooks and other sources. We analyze the overall sample as well as two sub-samples. Initially, we test whether the massive underpricing reported in previous studies continued in the years after reforms were implemented in China. In our sample, we observe an initial return of 93.42 %, on average. Although this value seems very high compared to Western markets, it is relatively low compared to those reported in previous studies of the Chinese IPO market. Moreover, under-pricing decreased over the years. To obtain a deeper understanding of the Chinese IPO market we look for explanatory variables which can explain initial returns. Our regression analyses reveal that the issuers" size, the lottery success rate, and the date of the IPO are significant variables for explaining initial returns. All in all, these findings are in line with previous literature affirming the emerging state of the market, although interestingly, we do not observe a significant link between the underwriters" reputation, the issuers" industry, the lock-up period and the initial return. We consider these results as an indication that the market has gained in balancing issuers" and investors" interests. This conclusion is supported by the observation of a high but decreasing degree of long-term underperformance of the IPOs. In summary, the Chinese IPO market seems to have developed in recent years but remains in an emerging state. Further development depends on political willingness to improve the market-orientation of the capital markets.