Qile Tan and Bill Dimovski Deakin University
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Transcript of Qile Tan and Bill Dimovski Deakin University
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The Underpricing of Infrastructure IPOs: Evidence from China
Qile Tan and Bill DimovskiDeakin University
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Initial Public Offering (IPO) underpricing:
• IPOs are common around the world • Before 2009, the US was the leading issuer of IPOs in terms
of total value. Since then, China has been the leading issuer, raising $73 billion (almost double the amount of IPO money raised on the NYSE and NASDAQ combined) in 2011
• Underpricing/first day returns to subscribers on average are also common. Facebook issue $38, close day1 $38.23
• Underpricing appears more severe in emerging markets
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Australia Lee, Taylor & Walter; Woo; Pham; Ritter 1,562 1976-2011 21.8% Canada Jog & Riding; Jog & Srivastava; 696 1971-2010 6.7% Kryzanowski, Lazrak & Rakita; Ritter China Chen, Choi, & Jiang; Jia & Zhang 2,102 1990-2010 137.4% France Husson & Jacquillat; Leleux & Muzyka; 697 1983-2010 10.5% Paliard & Belletante; Derrien & Womack;
Chahine; Ritter; Vismara Germany Ljungqvist; Rocholl: Ritter; Vismara 736 1978-2011 24.2% Greece Nounis, Kazantzis & Thomas; 373 1976-2011 50.8% Thomadakis, Gounopoulos & Nounis Hong Kong McGuinness; Zhao & Wu; Ljungqvist & 1,259 1980-2010 15.4% Yu; Fung, Gul, and Radhakrishnan; Ritter India Marisetty and Subrahmanyam; Ritter 2,964 1990-2011 88.5% Jordan Al-Ali and Braik 53 1999-2008 149.0% Malaysia Isa; Isa & Yong; Yong; Ma 413 1980-2009 62.6% United Kingdom Dimson; Levis 4,877 1959-2011 16.1% United States Ibbotson, Sindelar & Ritter; Ritter 12,340 1960-2012 16.8%
source: Ritter (2013)
Equally weighted average initial returns for 12 countries
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Some theoretical explanations for underpricing
Rock (1986) - IPOs need to be underpriced to continually attract uninformed investorsWelch(1989) – Underpricing allows for subsequent issues at a higher priceTinic (1988) suggests underpricing is like an insurance and prevents against damages to underwriters/directors Ruud (1993) – underwriters price support the issue for a short timeBeatty and Ritter (1986) – greater uncertainty, greater underpricing – older entities, larger entities, those with more reputable auditors and with banking and venture capital relationships – lower underpricing
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Underpricing in different industries
• Dimovski and Brooks (2008) – gold 13.3% (while industrials around 25%)
• REITs – US – Wang, Chan and Gau(1992) negative 2.82%, Ling and Ryngaert (1997) 3.6%, Bairagi and Dimovski (2011) 4.6%
• A-REITs – Dimovski (2009) 2.6%• J-REITs – Kutsuna et al (2008) 0.5%• Infrastructure – Australia 3.5% but not stat sig diff to zero• Infrastructure – India 25%
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Characteristics of infrastructure:
• high entry barriers• monopoly characteristics• long duration• large investment scale• inelastic demand• stable, tax effective and predictable cash flows via government
regulation and long-term contracts• low correlation with major asset classes• low volatility of cash-flows (Newell, Chau and Wong, 2009)
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What is infrastructure? • It provides the essential services for a community's
economic and social needs, eg:– transport: toll roads, airport, sea ports, rail, and bridges;– energy and utilities: electricity, water, and gas;– communications: mobile phone networks,
telecommunication networks, and satellite systems; and – social: healthcare, education, and correctional facilities.
(RREEF, 2005; and UBS, 2006a)
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Previous studies of infrastructure IPOs:
• Hong Kong Dewenter and Field(2001) 1996-1997, 7 infrastructure IPOs
report a 4.67% underpricing (not statistically significant). • AustraliaDimovski (2011) 1996-2007, 30 infrastructure IPOs report a 3.5%
underpricing (not statistically significant). • IndiaRitchie, Dimovski and Deb (2013) 2004-10, 49 infrastructure IPOs
report a 25.4% underpricing (statistically significant).
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Previous studies of infrastructure IPOs:
Author(s) Market Number of IPOs Year Initial return Significance
Dewenter and Field (2001) Hong Kong 7 1996-1997 4.67% NO
Dimovski (2011) Australia 30 1996-2007 3.50% NO
Ritchie, Dimovski and Deb (2013) India 49 2004-2010 25.40% YES
Tan and Dimovski (current study) China 154 1993-2012 91.10% YES
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Characteristics of the Chinese stock market:
• Two types of shares: A-share and B-share• Long delay between offering date and listing date Average 260 calendar days for A-share IPOs (Su and
Fleisher, 1999)• High government ownership • Highly speculate market
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Data:
• 154 A-share infrastructure IPOs issued during1993 to 2012
• Prospectuses were downloaded from Shanghai and Shenzhen stock exchanges
• CSMAR database is used for index returns and in the case of missing data in prospectus
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Summary statistics for the Chinese infrastructure IPOs during 1993 to 2012
Mean Median Max. Min. SD
First day return (%) 91.124 81.675 633.333 -68.364 80.311
Time delay (days) 31.299 16.000 608.000 2.000 55.371
Offer size(USD) 315,208,543 85,050,000 8,182,707,993 4,453,507 863,030,000
Offer price (CYN$) 9.603 6.380 69.000 1.500 10.297
Firm Age 3.656 2.000 22.000 0.00 3.880
Government ownership (%) 48.325 59.520 88.352 0.00 28.656
Market return (%) 0.725 -0.684 178.788 -51.185 20.419
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• Dependent variable: Initial returns
• Independent variables:– Stock exchange dummy– Market index return– Time lag between
offering and listing date– Firm age
– Offer price– Logarithm log of issue
size– Government ownership
after issuing– Pricing method dummy– Underwriter reputation
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Methodology:
• Ordinary Least Square (OLS)• Model 1:• Utilizing all variables except Time Lag and Market return
• Model 2:• Utilizing all variables
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Regression results:• In model 1 (LAG and MARKET are not included) offer price, stock exchange and issue size are highly
significant with expected signs.
• In model 2 (LAG and MARKET are included) stock exchange, time lag and issue size are highly
significant with expected signs.
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• Issue size (in log form) is significant with expected sign in all partitions in both models.
• Underwriter reputation and Government retention are not significant across all partition in both models.
Results:
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Summary:• The average initial return for Chinese infrastructure
IPOs during 1993 to 2012 is 91.1%, which is statistically significantly different to zero and relatively higher than in India and Australia.
• Infrastructure IPOs in China carry less uncertainty in the valuation of the IPO comparing to the whole market.
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Summary:• In China, the offer price and issue size appear to be
helpful in the prediction for the underpricing of infrastructure IPOs.
• Government retention and underwriter reputation do not have significant predicting power in our study.
• When time lag and market return being included in the regression model, the time lag and issue size can better explain the underpricing.
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Thank you for your time