A Comparative Study on the Ipo Pricing Efficiency Between China and Hong Kong Stock Market

This paper carries on a comparative study

between China and HK stock market,

aiming at finding out the structural discrepancy

between the two. The empirical

study results as follows: the IPO price in

China focuses on the internal factor of

firm, little information in the issue factor

and market factor. However, the IPO

price of HK includes not only the internal

factor of firm, but also the information of

issue factor and market factor. These

show that there still exist a lot of limitations

in IPO pricing efficiency for China

stock market.

Keywords: IPO, pricing efficiency,

multi-regression analysis

1. Introduction

Pricing of initial public offerings (IPOs)

is the most basic but critical problem in

the whole IPO process, which may be related

to the fundamental interest of all

parties or potential participants, and

would directly effect on the long-term

performance of the new issues. Prior literatures

have shown that early study on

the IPO pricing efficiency more focuses

on the problem of IPOs underpricing,

which assumes that the measure of pricing

efficiency is the underpricing rate

which the issue price departs from the

market price (usually the first-day closing

price). Thus based on this assumption,

many hypotheses and theories have been

set up to give their explanation, such as

the Winners' Curse Hypothesis (Beatty &

Ritter, 1986[1]; Rock, 1986[2]), the Signaling

Hypothesis (Allen & Faulhaber,

1989[3]), the Bandwagon Hypothesis

(Welch, 1992), the Ownership Dispersion

Hypothesis (Brennan & Franks, 1995[4])

and the like. Based on their prior studies,

many explanations are also given to the

formation of IPOs' underpricing in China,

which assumes that IPO underpricing in

China may attribute to imperfection of

IPO mechanism (Zhang Ren-ji et al, 1999)

or excess speculations in the secondary

market, the serious contradiction of supply

and demand in the primary market,

the immature investing believes and the

asymmetry information (Wang Chunfeng

et al, 2002).

Literature above pays more attention to

the underpricing of the IPOs, which only

give their explanations to the departure of

the issue price from the market price. But

it is not reliable enough to evaluation the

IPO pricing efficiency. Because all their

studies are based on the efficient market

assumption,