I have a simple rule for IPOs, Hong Kong ones at least; leave well alone.
Their popularity is, in part, based on data and historical experience from more ‘grown-up’ markets in which they’ve been shown to be subject to habitual under-pricing (they’re rarely, if ever, under-priced in HK for reasons I won’t go into here).
Assuming the pattern of systematic under-pricing was likely to repeat in China, Tianyi Song and Kenji Katsuna at the Kobe University’s Graduate School of Business Administration, set about looking at IPOs from 2000 to 2017 in Shenzhen and Shanghai (2,471 in all) to see if the level of Economic Policy Uncertainty (EPU) exacerbated price suppression.
An interesting aside here. To calculate EPU they used an established academic practice of analyzing press reports for certain key words. Especially interesting was they chose the South China Morning Post in Hong Kong for this. Why? “As the media in Hong Kong are not regulated by Mainland China, the advantage of using SCMP to measure EPU is that it is less subject to government censorship than newspapers in Mainland China.” Hmm…
Back to the paper. Yes, the level of EPU affects IPO pricing in the way you’d expect i.e. the greater the EPU, the lower the IPO prices.
The effect was more pronounced for small firms, those with less analyst’s attention and for those with poor liquidity. Firms less affected were those that had ‘prestigious’ underwriters and/or ‘high quality’ auditors. VC backed firms though tended to suffer even with these better credentials.
The recommendations for investors seem obvious and make intuitive sense into the bargain. If feel you really must fish this pond then you should read the paper in full which you can find via the following link Underpriced IPOs.
Happy Sunday.