Offline Oversubscription, Issue Size, and Market Momentum: The Driving Forces for ChiNext IPOs’ Initial Underpricing

This paper reexamines the driving forces for the first day initial return for ChiNext IPOs. We start from screening 29 potential explanatory variables, 4 policy break dummies, and 2 intraday trading suspension dummies, using an OLS model with dimension reduction techniques to identify significant variables. We then apply a 2SLS procedure to remove endogeneity without losing any important information. With the variables identified from the 2SLS model, we further apply a GARCH-M model with an ARMA(1,1) adjustment in the residuals to correct possible autocorrelation in the regression residuals and cross-correlation between the initial return and its conditional return variance. We find that the model fits the data well. From a number of potential factors in pricing Chinese IPOs, we identify three factors that drive the initial underpricing of ChiNext IPOs: the pre-issue share allocation multiplier from institutional investors (offline oversubscription), issue size (size effect), and the listing day stock market condition (market momentum). We estimate the contribution to the initial underpricing from each of the significant variables.