Bulletin Spring‧Summer Autumn‧Winter 1999

Average price relative of 101 IPOs in the first 5 aftermarket days (By month and by pre-listing market sentiment) Fig. 1 puzzles i n capital market research. The problem is magnified i n the Chinese stock market. Unde r p r i c i ng is systematic and substantial. The IPOs of A-shares were underpriced b y as mu ch as 400 per cent on average. For certain new issues, the average closing price on day one aftermarket was as h i gh as 17 times of their offering prices (see Fig. 1). The gross underpricing and the resultant expectation of a sure way to get rich led to tremendous oversubscription, and half a m i l l i on people pou r i ng into Shenzhen to purchase 'application forms for share lottery' i n 1992, wh i c h culminated i n a riot on 11th August 1992. Phase I Research: Tracking Stock Markets i n Shenzhen and Shanghai Dr. Hen r y Mok 's project w i l l examine the IPO phenomenon i n China, i n three phases. F i r s t, the ex t ent of u n d e r p r i c i ng a nd volatility w i l l be tracked for China's t wo stock markets i n Shenzhen and Shanghai, for bo th A and B shares, over the period 1990-93. Measures of ma r ke t r e t u r n, name ly the average price relatives, cumulative average return i n excess of the ma r ket effect etc. w i l l be used i n the analysis. The i n s t i t u t i onal arrangements of unde r w r i t i ng IPOs w i l l also be studied, w i t h a focus on their impact on the extent of underpricing. Specifically, the speculative bubble hypothesis is tested. Wi t h data on 101 unseasoned A-share and 22 B-share new issues i n Shanghai, Dr. Mo k has f ound that the A-shares were grossly underpriced by about 400 per cent on average. The underpricing of B-share IPOs, however, was not supported. A f t er excluding the effects of price limits and market co-movements, the fad or the speculative bubble explanation of aftermarket inefficiency was supported for the bear issues and not for the b u l l issues and the B issues. A v e r y l a r ge pe r cen t age of shares outstanding is f o u nd to have changed hands on Research 23