The long-term performance of Hong Kong share-only and unit initial public offerings (IPOs)

This study examines the long-term price performance of share-only versus unit IPOs issued on the Hong Kong Stock Exchange during 1990-2002. Our main objective is to test the extent to which the agency cost and signaling models explain the reasons for unit IPOs issuance using the long-term price performance approach. The agency cost model suggests that firms include warrants in their offerings to bind managers to optimal investment decisions. Under this model, unit IPOs are expected to possess better quality projects and, therefore, generate higher long-term risk-adjusted returns than share-only IPOs. The signaling model expects unit IPOs to be riskier than share-only IPOs. To compensate investors for bearing the extra risk, unit IPOs should yield higher returns than share-only IPOs in the long run. Thus, the signaling model expects unit IPOs to outperform share-only IPOs at least before conducting appropriate risk adjustments. Our long-term price performance evidence rejects the predictions of both models.