Strategic IPO Underpricing: The Role of Chinese State Ownership

Abstract

Initial public offering (IPO) underpricing remains a puzzle after decades of investigation. The stock markets in emerging economies are attractive to international investors but their unique characteristics need to be examined. Chinese stock markets experienced much more significant IPO underpricing than most other stock markets in the world. This paper offers a two-period wealth maximum model to explain the strategic IPO underpricing by state owners. Given the fact that the entire IPO procedure, including IPO price, is regulated and controlled by state owners, we argue that state owners strategically underprice the IPO, because they care less about the IPO proceeds but more about the wealth gain after IPO. The empirical finding of a positive relationship between IPO underpricing and state ownership in Chinese stock market is consistent with the wealth maximization hypothesis of IPO pricing. The paper offers better understanding for IPO procedure of state-owned enterprises in emerging markets.

Citation

Wang, Y. and (Tina) Zhang, X. (2006), "Strategic IPO Underpricing: The Role of Chinese State Ownership", Choi, J.J. and Click, R.W. (Ed.) Value Creation in Multinational Enterprise (International Finance Review, Vol. 7), Emerald Group Publishing Limited, Leeds, pp. 475-495. https://doi.org/10.1016/S1569-3767(06)07020-8