Short-run underpricing and its characteristics in Chinese initial public offering (IPO) markets

Using data on 668 new issues from 1 January 1996 to 31 December 2000 in China, we find that the average underpricing of Chinese IPOs1 is 129.16 percent. We employ cross-sectional analysis and find that Chinese IPO underpricing is primarily explained by the inequality of supply and demand caused by the quota system and the high proportion of uninformed individual investors. The results also show that during the privatization, the government does not send signals on the quality of the issuers by underpricing, but it does capture the market opportunities to time IPOs to get the best market feedback on offerings. (C) 2004 Elsevier B.V. All rights reserved.