Underpricing in China Stock Market: An Investigation of A and H Share

Abstract: Underpricing of initial public offerings is a very pervasive phenomenon in stock markets all over the world. A and H shares are common stocks with same voting and dividend rights issued by companies incorporate and operate in Mainland China. A share and H share have different target investors and are listed in Mainland China and Hong Kong stock markets respectively. An investigation of underpricing for A and H share, and the underpricing difference between A and H share in China stock market has practical implications to facilitate the integration of China capital market. This paper investigates A and H share listed on both Mainland China and Hong Kong stock market. It is reported that the average underpricing for A share in Shanghai Stock Exchange and Shenzhen Stock Exchange is 100.60% and 70.27% respectively. However, for H share in Hong Kong Stock Exchange, the average underpricing is just 16.08%. Multiple regression approach is used to examine the underpricing phenomenon in China stock market. Empirical results suggest that investors' enthusiasm to invest in new shares, a series of regulatory changes during the selected sample period, ex-ante uncertainty faced by investors and whether a company has sequential SEOs are highly related to IPOs underpricing for A share. As for IPOs underpricing for H share, it is found that investors' enthusiasm to invest in new shares matters but cannot be compared with the scale of Mainland stock market. Moreover, different from Mainland China, the shorter time gap between offering and listing date in Hong Kong stock market has negative effects on underpricing. Relevant results are of economic significance. Further study also finds that investors' enthusiasm to invest in new shares, regulatory changes, ex-ante uncertainty faced by investors, and issuers' incentive to have SEOs are key determinants for underpricing difference between A and H share. The results from this study also provide practical implication to policy-makers in China.