IPO underpricing and long-term performance in China: the perspective of price limit policy
ISSN: 0307-4358
Article publication date: 30 March 2021
Issue publication date: 12 August 2021
Abstract
Purpose
The purpose of this paper is to explore how the price limit policy implemented in 2014 affects initial public offering (IPO) underpricing and long-term performance in China.
Design/methodology/approach
The data are the IPOs from Shanghai Stock Exchange (SSE) and Shenzhen Stock Exchange (SZSE) between 2004 and 2018. The data are firstly divided into the IPOs before the price limit policy and the IPOs after the price limit policy according to the time of issuance. Then the two groups are divided into 4 subsamples according to the market blocks and the P/E ratio. The authors use multiple regression models to explore the effect of price limit policy in each subsample.
Findings
The first-day price limit system for IPOs is similar to the upward fuse mechanism, the purpose of which is to suppress IPO underpricing. However, this study finds that the policy does not suppress IPO underpricing, but increases the underpricing rate in all subsamples. Besides, the long-term performance in each subsample is different from each other. Main Board stocks’ long-term performance is worse after the policy. The policy makes Small and Medium Enterprise Board (SME Board) and Growth Enterprise Market Board (GEM Board) stocks with high P/E ratios perform better in the long term. For SME Board and GEM Board stocks with low P/E ratios, the policy makes no significant effect.
Practical implications
Good policy intentions may sometimes lead to counterproductive effects. However, since the long-term performance of each subsample is different, it is difficult to judge whether the policy should continue to be implemented or cancelled. Implementing different policies for different subsamples may be a better way to solve this problem.
Originality/value
This paper contributes to the study of IPO underpricing and long-term performance from the perspective of price limit policy.
Keywords
Acknowledgements
The authors would like to thank the referee and the editor for their helpful comments and suggestions. All errors are our own responsibility. The authors also thank the financial support from the National Natural Science Foundation of China (71790594, 72001157 and 92046024), College Students' Innovative Entrepreneurial Training Plan Program (202010056069) and Scientific Research Project of Tianjin Educational Committee (2019KJ131).
Citation
Wang, Y. and Wang, G. (2021), "IPO underpricing and long-term performance in China: the perspective of price limit policy", Managerial Finance, Vol. 47 No. 9, pp. 1233-1252. https://doi.org/10.1108/MF-08-2020-0428
Publisher
:Emerald Publishing Limited
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