A study of initial public offering underpricing in Hong Kong

Pao Yue-kong Library Electronic Theses Database

A study of initial public offering underpricing in Hong Kong


Author: Chan, Man Denis
Title: A study of initial public offering underpricing in Hong Kong
Degree: M.B.A.
Year: 1995
Subject: Going public (Securities) -- China -- Hong Kong
Hong Kong Polytechnic University -- Dissertations
Department: Dept. of Management
Pages: 56, [24] leaves : ill. ; 30 cm
Language: English
InnoPac Record: http://library.polyu.edu.hk/record=b1555467
URI: http://theses.lib.polyu.edu.hk/handle/200/2784
Abstract: Previous studies of underpricing in Initial Public Offerings ( IPOs ) , Ibbotson (1975), Mcdonald and Fisher (1972), Miller and Reilly (1987), Barry and Jennings (1993), Aggarwal, Leal and Hernandez (1993) all demonstrated this well documented phenomenon which is recurring in different capital markets of the world. This study is designed to analyze the 66 IPOs in 1993 in order to investigate the existence of such phenomenon in Hong Kong, the best city in the world for business ( Fortune 1994 ). The aim of this study is to determine the rate of initial return of these 66 IPOs and to study their after market performance for six months. The Null Hypothesis is : the average rate of initial return of the IPOs will be equal to zero, i.e. H0 = 0. Both opening and closing price of the first transaction day are used for calculation to see for the intra-day difference. The IPOs will be categorized into H Shares and Regular Shares and grouped into four sectors, the Finance, Property, Industry & Commerce, and Utility for further analysis. The results demonstrate a significant and positive initial return of 34.4% ( if opening price is used ) or 35.8% (if closing price is used). This result provides evidence that the 66 IPOs in Hong Kong in 1993 are underpriced. This is in line with other studies quoted above. The IPOs, when grouped into four sectors also demonstrate a significant positive initial return. The H Shares in our study group seem to have a higher average return than the Regular Shares. The IPOs in the Industry & Commerce sector demonstrate a fairly consistent after- market performance, while the IPOs in other sectors fluctuate more. When considering all 66 IPOs together, it is found that the average return after each month interval does not have a significant difference between each other and from the initial return. It can therefore be concluded that the gain will be the same if the subscriber sells the stocks in the first trading day or holding the stocks for six months. Only original purchasers in the offering benefit from the underpricing of the IPOs.

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