Share Issuing Privatizations in China: Determinants of Public Share Allocation and Underpricing

Using data on 451 Chinese privatizations over the period 1994-2002, this paper empirically investigates the firm and stock market characteristics that determine the size of the portion of new shares sold to the general public and underpricing at SIP-time. We find that poor performance and financing constraints, reflected by a low profitability and high leverage, mainly drive public share allocation. Also, the government widens ownership to a larger extent in firms that receive substantial subsidies. By contrast, stock market returns pre-SIP and variables capturing the firm's growth opportunities do not positively affect public share allocation. Yet, in firms with a low market-to-book ratio, the government is more likely to relinquish its majority stake at SIP-time. The determinants of underpricing further illustrate the uniqueness of SIPs compared to private-firm IPOs. Overall, there is little evidence that information asymmetries regarding firm value influence first-day returns whereas stock market conditions have an impact. After accounting for the endogeneity of the public share allocation decision, we find that the fraction of ownership divested is significantly positively related to underpricing.