The short-run price performance of initial public offerings in Hong Kong: New evidence

Abstract

The study examines the first day returns of over 480 initial public offerings (IPO) in Hong Kong during a 12-year period (1994-2005). Based on this set of observations the study builds a comprehensive model of the short-term price performance of new offerings, in the light of the existing theoretical hypotheses about IPO underpricing. Results show clear evidence of the signaling effect of underwriters' reputation. For a set of different conditions and time periods examined, the most sought after underwriters are consistently associated with less underpriced offerings. In addition, the study shows that offerings underwritten by two or more underwriters tend to be less underpriced and that underpricing may be a signal in its own right. The study also shows that the informed demand hypothesis of Rock (1986) is supported only where some specific circumstances are verified. Finally, results confirm the recent trend (in Hong Kong) towards a less aggressive underpricing.Ex-ante uncertainty Initial public offerings Subscription rate Underpricing Underwriters' reputation