Underpricing and overvaluation in Chinese IPO market

This paper examines the abnormal initial return (AIR) of initial public offerings (IPOs) in China and finds that IPOs in China are both underpriced in the primary market and overvalued in the secondary market. Using a sample of 520 A-share IPOs during the periods of 1998-2003 and comparable firms as benchmarks, we decompose AIR into underpricing and overvaluation. The mean AIR in Chinese IPO market is 0.7726, with underpricing to be 0.6241 and overvaluation to be 0.1485. We also examine the effects of financial deregulations and investor sentiment on underpricing, overvaluation and AIR respectively. We find that financial deregulation did not reduce AIR significantly. Financial regulations lead to severe IPO underpricing in the primary market. While investor sentiment drive the first-day trading price far away from the intrinsic value. Financial deregulations can decrease the underpricing but have little impacts on overvaluation.