Pricing and Allocation Mechanisms in Underpricing of Chinese IPOs

This study tries to answer the question: Do changes in pricing and allocation mechanisms significantly affect the Chinese initial public offering (IPO) market? Four separate pricing and allocation mechanisms for the Chinese IPO market, operating from 1995 to 2007, are examined. We find that as these mechanisms evolved, the average and variance of IPO underpricing in China became smaller. The results indicate that as the Chinese IPO market has become more market-oriented, underpricing has significantly decreased, and the market has become more stable.