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Xiaoying Guo

DBA Graduate - 2019

Thesis title

IPO initial return volatility and risk factors : evidence of Chinese market reform 2009

Supervisor(s)

Haifeng Guo
Purpose The IPO regulation system reform in 2009 is one of important step toward to market orientation of the Chinese A share market. This study tried to answer the question that what really happened to the initial returns and after market performance. This study is focus on how the regulatory reform changed the initial returns of IPOs and what were the related determinants (refer to the risk factors to reflect the uncertainties of IPOs), as well as the reasons and factors caused the aftermarket performance phenomenal in the period. Design/methodology/approach This study is designed based on two hypotheses: 1) what happened to the initial returns after the IPO reform in 2009? 2) What reasons caused the aftermarket price performance in the IPO market after the reform? Theoretical analysis has been used to review the literatures in the IPO field both internationally and domestically to understand the IPO initial returns and aftermarket performance theories and their development. The Chinese market and its institutional system development review have been done to find the limitation of the institution arrangement and its background and why the investors behave in the irrational way compared with that in the mature market. This study is also use empirical analysis approach to collect and process data. Descriptive statistics, econometrics theory have been used to analysis the relationship between variables. The data used in this study was 598 IPO shares listed on the IPO market in China from September 2009 to April 2011. Findings The study concluded that first, after the first IPO reform in 2009, the underpricing level was reduced significantly and the issuance price level in the period was released to get more freedom. However, the IPO issuance price after the reform was far from the true value (fair price) of companies. The very high issuance price after regulation reform mainly drove by the self-interests of the issuers and underwriters. The phenomena caused those well-informed investors had low enthusiasm to buy shares which caused a large number of stock breaks after the reform. The price up-date had a negative correlation with the initial return: The greater the price update, the smaller the initial return. Secondly, the first day turnover ratio has a significant positive contribution to the initial return. The turnover ratio reflected the demand of IPOs from investors and resulted in the high initial returns on the first day. Thirdly, IPO initial return was also affected by market conditions associated with investor sentiment. The fast economic growth market environment was the indicator to reflect market sentiment and the market sentiment was derived from the investor sentiment. Forth, new shares underwritten by reputable underwriters have smaller IPO pricing adjustment degree which reflects the reputation of the underwriter is increasingly important to underwriters in Chinese market.