Using a unique and hand-collected dataset, we investigate the impact of the risk factors disclosed in the prospectuses on the initial returns for ChiNext IPOs. After controlling for the market-, firm- and offer-specific characteristics, we identify several significant risk factors that include “policy changes on taxation or government subsidy”, “higher depreciation and/or amortization due to proposed capital expenditures”, “ongoing litigation or lawsuit”, and “piracy or trademark infringement”. Concerns for ongoing litigation risk seem to be most important as the risk affects both the opening and closing price returns positively and significantly, indicating risk compensation through deep underpricing. The other three risk factors only affect the closing price return. Similar to the impact from the ongoing litigation or lawsuit risk, the trademark infringement risk affects the closing price return positively. On the other hand, the risks associated with possible policy changes on taxation or government subsidy and higher depreciation and/or amortization due to proposed capital expenditures have negative impacts on the closing return. In line with our conjecture of a short-term equilibrium, none of the risk factors disclosed in the prospectuses are found significant for the 21st trading day (monthly) initial return.
IPO initial underpricing Market-, firm-, and offer-specific characteristics Risk exposures in ChiNext IPOs’ prospectuses Model specification
G12 G14 G15
This is a preview of subscription content, log in to check access.
We would like to thank two anonymous referees and the editor for insightful comments and suggestions to improve the paper. All possible errors remaining are ours.
Beatty RP, Ritter JR (1986) Investment banking, reputation, and the underpricing of initial public offerings. J Financ Econ 15:213–232CrossRefGoogle Scholar
Boubaker S, Gounpopoulos D, Kallias A, Kallias K (2017) Management earnings forecast and IPO performance: evidence of a regime change. Rev Quant Financ Acc 48:1083–1121CrossRefGoogle Scholar
Chi J, Padget C (2005) The performance and long-run characteristics of the Chinese IPO market. Pac Econ Rev 10:451–469CrossRefGoogle Scholar
Chiou J, Li ML, Cheng L, Chang S (2010) Pricing and allocation mechanisms in underpricing of Chinese IPOs. Chin Econ 43:93–108CrossRefGoogle Scholar
Deng Q, Zhou Z (2015) Offline oversubscription, issue size, and market momentum: the driving forces for ChiNext IPOs’ initial underpricing. Chin Econ 48:114–129CrossRefGoogle Scholar
Deng Q, Zhou Z (2016) The pricing of first day opening price returns for ChiNext IPOs. Rev Quan Financ Acc 47:249–271CrossRefGoogle Scholar
Drake PD, Vetsuypens MR (1993) IPO underpricing and insurance against legal liability. Financ Manag 22:64–73CrossRefGoogle Scholar
Gannon G, Zhou Y (2008) Conflicts of interest and China’s A-share underpricing. Int Rev Financ Anal 17:491–506CrossRefGoogle Scholar
Gao F, Siddiqi MA (2012) The rationale for IPO lockup agreements: agency or signaling? Rev Pac Basin Financ Mark Polic 15:1250013-1–1250013-18Google Scholar
Guo H, Brooks R (2008) Underpricing of Chinese A-share IPOs and short-run underperformance under the approval system from 2001 to 2005. Int Rev Financ Anal 17:984–997CrossRefGoogle Scholar
Guo H, Brooks R, Fung H (2011) Underpricing of Chinese initial public offerings. Chin Econ 44:72–85CrossRefGoogle Scholar
Hughes PJ, Thakor AV (1992) Litigation risk, intermediation, and the underpricing of initial public offerings. Rev Financ Stud 5:709–742CrossRefGoogle Scholar
Hussein M, Zhou Z (2014) The initial return and its conditional return volatility: evidence from the Chinese IPO market. Rev Pac Basin Financ Mark Polic 17:1450022-1–1450022-32Google Scholar
Jin C, Li T, Zheng SX (2016) IPO offering size and analyst forecast. Rev Pac Basin Financ Mark Polic 19:1650020-1–1650020-25Google Scholar
Liu Z, Elayan FA (2015) Litigation risk information asymmetry and conditional conservatism. Rev Quant Financ Acc 44:581–608CrossRefGoogle Scholar
Loughran T, McDonald B (2013) IPO first-day returns, offer price revisions, volatility, and form S-1 language. J Financ Econ 109:307–326CrossRefGoogle Scholar