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Risks and Returns of Initial Public Offerings (IPOs)



This dissertation was designed to focus on an assessment of the risks and returns of the initial public offerings (IPOs) issued in Hong Kong versus China. In recent years,
China’s stock market has experienced phenomenal growth with a record of US$62 billion raised in 140 IPOs in 2006, more than that raised in the United States of US$48 billion.1 The growth of China’s economy continues to fuel the expectations that this trend of strong IPO growth would continue and that Chinese firms would increasingly pursue listings in the Chinese and Hong Kong stock exchanges to tap international investors for their fund raising requirements. A recent example of a Chinese firm doing an IPO was China Railways Construction which issued US$3.1 billion in an IPO in February 2008.2

The key rationale in pursuing this research was that it would give an understanding of the key differences between listings in the Chinese and Hong Kong stock exchanges, particularly in relation to risks and performance (i.e. returns). Based on the statistical analysis of the existing information, there was no marked difference seen in
the performance of the IPOs of the mainland Chinese firms in the Hong Kong Exchange versus the performance of the overall exchange (represented by the Hang Seng index). The data availability limited the statistical analysis primarily to the IPO information from the Hong Kong Exchange.

The assessment of the risks and performance of the IPOs in the Chinese and Hong Kong stock exchanges led to the following conclusions: (1) Hong Kong is favoured
overseas exchange for dual listing of mainland Chinese firms, (2) there is strong uncertainty in listing in the Shanghai Stock Exchange, and (3) interest in China is strong and investors can be tapped through an overseas listing.

For the mainland Chinese firms that will be issuing their IPOs, the following are the recommendations resulting from the dissertation: pursue a dual listing, list in the
Hong Kong Exchange for the overseas exchange listing, and manage the timing of the IPO. Finally, for further research work, the following are the recommended steps that can be taken to develop the issues in greater detail and address other related concerns: pursue comparison of long-term performance of IPOs, compare the options
available for mainland Chinese firms in terms of their IPOs, and assess IPO performance across other factors (such as size of firms, sector of firms, and extent of local versus global breakdown of the business).


The dissertation had two key research questions which were addressed during the research. These research questions guided the research design and methodology of the dissertation. The two research questions were:

1. How have the firms listing in Chinese and Hong Kong stock exchanges performed since their IPOs, and what risks did these firms face in their listings?
2. How have the IPOs in Chinese and Hong Kong stock exchanges performed compared to each other and also in relation to regional and global competitors?

The rest of this section discusses these research questions in greater detail.


The dissertation sought to determine the performance since IPO of Chinese and Hong Kong stock exchange listings, and the risks faced by the firms listing in these exchanges. The research aims and objectives for this part of the dissertation focused on the following:

· Assess the performance of the listings in the Chinese and Hong Kong stock exchanges. This assessment focused on how listings have performed in the stock exchanges of Hong Kong and China. This gave an indication of the performance of the stocks which were listed through an IPO, and provided an opportunity to analyse the differences, in terms of performance, in listing between the Chinese and Hong Kong stock exchanges.

· Determine the risks faced by firms pursuing an IPO through the Chinese and Hong Kong stock exchanges. Another objective pursued in this dissertation was determining and understanding the risks that IPOs of firms listing in China and Hong Kong faced. As options have expanded in terms of the location where firms can list
in, firms consider various factors in deciding on the best stock exchange for the listing of their IPO to be done. The different options also need to be assessed in terms of the risks that the firms are exposed to by listing in these exchanges.

Understand other factors that have affected performance and risks of firms. The recent developments in the financial markets brought on as an impact by the US subprime
markets have also affected the performance of recent listings not only in the Chinese and Hong Kong stock exchanges but also in other stock exchanges as well.
These factors and the impact these factors have had on the performance of recent IPOs in the Chinese and Hong Kong stock exchanges were also identified and presented in this dissertation.

· Analyse issues using quantitative and qualitative analysis.

In pursuing the assessment of the points above, this dissertation pursued both a quantitative and a qualitative approach to ensure that the research methods provided a complementary approach. This was also designed to ensure that the inputs to the analysis had a robust basis with the assessment of performance and risks based off actual quantitative results supported by input from industry practitioners and their observations.


The assessment of the performance of the IPOs was reviewed by comparing the performance of the IPOs of the Chinese and Hong Kong stock exchanges. In addition,
these were also compared versus the performance of IPOs in selected regional and also global stock exchanges to give an indication of the relative performance of the IPOs in these different exchanges.

The research aims and objectives of this part of the dissertation were the following:

· Assess objectively the performance of the IPOs in the Chinese and Hong Kong stock exchanges versus selected regional and global stock exchanges.

This assessment was conducted using the performance data of selected firms in these exchanges to provide an indication of their relative performances. Thus, the dissertation sought to expand on the initial issue raised on the performance and risks of IPOs between Chinese and Hong Kong stock exchanges. This provided an added viewpoint into how different the performances of the IPOs have been in these exchanges.

· Understand factors and issues affecting the relative performances of the IPOs.

With the differences in the performances of IPOs identified in the previous point, the dissertation sought to analyse the factors affecting these differences. This assessment
was important as it provided the opportunity to pursue further research of the issues, resulting in increased understanding of factors affecting the performance of the IPOs
in these stock exchanges.

These two points above were the key research objectives in assessing the performance of the IPOs of the Chinese and Hong Kong stock exchanges versus the IPOs of other selected regional and global stock exchanges.


There were several key reasons identified as to the rationale behind pursuing this dissertation. This section discusses the research rationale first from an academic research
point of view and then, second, from a personal point of view of the researcher in terms of the benefits achieved in completing the dissertation.

From an academic research point of view, the following were the key reasons identified:

· Drive decision for location of IPO for firms listing in stock exchanges:

The results of the research could be utilised in forming a decision as to the location of a firm’s IPO. With greater transparency of the performance and risks in listing in China versus listing in Hong Kong, firms now have further factors to include in building a decision for the location of a firm’s IPO. This point is particularly relevant
for mainland China firms which are looking to tap international overseas investors for their IPO and are considering various options for their action.

· Provide alternative options and thought processes for firms considering their IPOs:

The results of the dissertation also provide firms pursuing an IPO in China or Hong Kong further basis for possibly considering other options outside of China or
Hong Kong, given the points raised in the findings and analysis section. For example, firms now are not limited only to the thinking pursuing the funding of
Chinese firms is best achieved by tapping both the Chinese and Hong Kong stock exchanges for a dual listing as this gives Chinese firms best access to the funding capability of international investors.

· Push stock exchanges to manage more effectively the marketing of their products and services:

The dissertation also benefits the Chinese and Hong Kong stock exchanges as this dissertation provides the stock exchanges the basis and the opportunity to revisit their product and service offerings, and ensure that their marketing properly addresses the requirements of Chinese firms in capital markets’ financing. The review of the Chinese and Hong Kong stock exchanges versus its regional and global peers also provide the stock exchanges an objective assessment of performance levels relative to each other.

On a personal level, the dissertation also benefited the research considerably, and also lends further basis to providing a strong rationale for completing the dissertation. The key personal reasons for the researcher in pursuing this dissertation, aside from completing school requirements, include the following:

· Improve knowledge and expertise of researcher.

The dissertation was very specific in the research questions addressed and the research issues to be assessed. Thus, the researcher’s knowledge in these specific academic and business areas were considerably enhanced with the conduct and completion of the dissertation, including the pur suit of in-depth research and the structuring of questions and issues for the dissertation. The understanding of the issues in this dissertation will be very helpful to the researcher as other challenges are faced in an academic and business setting.

· Build project management skills.

The dissertation provided the researcher the opportunity to build on project management skills as well given the extent of the period and the different aspects required in completing the dissertation, or project.

This skill will be very beneficial to the researcher particularly once this is utilised in the business world where the ability to manage projects, as well as multi-task, is appreciated.

The two points above provided further rationale to the pursuit of the completion of this dissertation, and gave the researcher strong reasons for undertaking the dissertation in addition to the given benefit of completing a requirement for school.


The issue of performance and risks in issuing IPOs in exchanges has been analysed in various research works and there is a relatively comprehensive research work
that can form the basis of further research work. For example, assessments of the performance of IPOs of stock exchanges have been done in a number of exchanges
already. One research in particular focused on an assessment of the long-term performance of the IPOs of Europe’s new stock markets.3 The research works focusing
on the issue of IPO performance are expected to continue to be of importance to the academic finance community given the debate which goes on relating to the near-term abnormal returns of IPOs and their long-term underperformance.

The focus of this dissertation is a comparison and assessment of the performance and risks of IPOs issued in Chinese and Hong Kong stock exchanges. This research
differs in other bodies of academic work in that this specific research issue has not been addressed directly. Certainly, the existing literature and academic research provides a preliminary path and approach in resolving the key research questions defined at the beginning of this dissertation paper.

In reviewing the related literature on the assessment of risks and performance of IPOs in Chinese and Hong Kong stock exchanges, a number of consistent themes were
noted as predominant in the research works. In order to assess the themes which may have contrasting supporting research, these themes are presented below and form the structure for the rest of this section reviewing the related literature:

· Methods for assessment of IPO performance
· Performance of IPOs
· Risk assessment of IPOs
· Period of assessment
· Chinese and Hong Kong IPOs

The points above are the key factors discussed in this section.


One of the areas that need to be reviewed is the research methodology that previous research works have utilised in pursuing their research. The related literature
has shown that the typical method used in analysing the performance largely relies on the use of descriptive statistics. In some occasions, qualitative assessment are included as part of the research methodology in order to gain greater understanding of the performance and the factors affecting the performance of the IPOs.

The research mentioned earlier in this section which focused on an assessment of the long-term performance of the IPOs of Europe’s new stock markets used both
qualitative and quantitative assessments as part of the methodology.5 The research approach was a combination of qualitative assessment (to discuss the rationale for the
resulting performance) and quantitative analysis (on the IPO performance and which, as expected, was analysed and presented using descriptive statistics).

The research work noted in the introduction highlighting the continued debate on the near-term abnormal returns of IPOs and their long-term underperformance was a
research piece focused on the returns of IPOs from the Istanbul Stock Exchange. In this research, the performance of the IPOs was assessed utilising descriptive statistics with a comparison of means (z-test: sample for two means) as part of the statistics tool kit utilised.

Clearly, the use of descriptive statistics and statistical tests for significance seems to be the preferred method of analysis for these types of research assessments. The
dominant use of descriptive statistics also provides confidence that this is the method that would be most logical for the dissertation in the assessment of performance of the IPOs in the stock exchanges.


Another area focused on in this dissertation is the performance of the IPOs in the Chinese and Hong Kong stock exchanges as well as other regional and global stock
exchanges. In terms of IPO performance assessment, one research work focused specifically on bank IPOs and their growth. Interestingly, this and the research work
mentioned earlier on IPO performance (Europe’s new stock markets) both found that long-run post-offering returns were poor when compared to various market benchmarks.

This finding was supported by another research whose results were from an analysis of 6,000 NASDAQ IPO stocks. Thus, there seems to be a number of research works that have shown the underperformance of IPOs versus other more established stocks or the market benchmarks. A research paper that focused on this underperformance showed that a reason for the underperformance of IPOs was the high expectations which were linked to the IPOs and which affected the prices paid for these offerings. This result is rather ironic as the high expectations given by investors indicate that these investors expected much higher returns from IPOs versus other stocks that these investors could have invested in.

A research work with similar findings on the long-term underperformance of IPOs was done on the UK IPOs from the period 1996 to 1999.9 For this research, the
long-term underperformance of the IPOs in the study was considerable versus the market performance. A period of three years was used as the long-term period. The research notes that this underperformance has been seen in a large number of countries where the IPO performance was measured over a number of years to assess its performance. The key factors identified in the research as impacting on the long-term performance of the IPOs were:

(1) percentage of equity issued as part of the IPO, and

(2) degree of multinationality of a firm issuing the IPO.

On the first point, the research finding noted that the greater the percentage of the equity issued for the IPO, the greater the probability of underperformance over the long-term. On the latter point, the research finding was that the greater the multinational component of a firm was, the better the expectation for a long-term performance.

Further to the research on UK IPOs, another research work on the UK IPOs but focused on the AIM-listed firms versus those on the main board of the London Stock Exchange showed a similar result in terms of long-term underperformance of IPOs.

This research work has an additional finding on the cost of equity that is relevant to the risks faced by firms pursuing an IPO. This finding is discussed in greater detail in a later part on the assessment of risks.

The research works with an assessment showing poor long-run returns for IPOs is not unanimous though as opposing performance arguments also exist with IPOs being
shown to be undervalued and thus provide good, long-run returns even versus the market. However, the reasons that the results are different for this research work is the
adjustment done on the valuation of the IPOs which result in the IPO valuation being markedly different from those considered in the other researches which found poor longrun returns for IPOs. This research work utilised an alternative method with adjustments made on the performance of the IPO stocks.

The research work on the Istanbul Stock Exchange highlighted a number of reasons for the performance of the IPOs, particularly the abnormal returns shown in the near-term: overvaluation of IPOs by investors and deliberate under-pricing for the IPO which then rewards the informed investors.

The long-term underperformance of IPOs is not shared and accepted universally as other research works exist which shows that this is not the case, at least for the
particular market and time period considered in these research works. A research on Malaysian IPOs from 1992 to 1996 showed that these IPOs showed particularly strong growth in stock prices over a three-year period from the issuance. This thus negates the concept of long-term underperformance shown by a number of research works. The difference in results could be attributed to a number of factors which could include differences in the parameters of the research factors related to the IPOs such as, for example, the definition of long-term in the assessment (this Malaysian research study utilised a period of three years to define the long-term).

Further evidence of long-term performance contrary to other international evidence is that result from a review of IPO performance in Greece from the period 1993 to 1997, which showed that the IPOs performed much better than the market over the long-term and not just in the near-term for the effects of the abnormal near-term returns. In this research work, the definition for long-term performance was again different as the period of one year was taken for this assessment to reflect the long-term performance of the IPOs. The research piece attributes the difference with international evidence to possibly the legal framework, the institutional arrangements, and the degree of development of the capital markets.

To further complicate the current thinking on the performance of IPOs, a research work focused on Germany IPOs from 1977 to 1995 showed varying performances over the long-term with some IPOs resulting in considerable underperformance while other IPOs showed excellent long-term performance.15 The focus of the research was not necessarily the determination of the long-term performance of the IPOs and thus could not be considered as inconclusive. The actual focus of the research work was the determination of the action post-IPO and the ability to determine which of the IPOs would perform better over the longer-term. The research finding was that the key predictor of the long-term performance of an IPO was the subsequent financing activity in the equity market with the firms being able to raise additional funds soon after the IPO slated for out-performance versus other firms which failed to generate further funding.

Several reasons have been put forth as supporting the underperformance of IPOs in most markets. A research work which looked at French IPOs but focused on the
impact of ownership resulted in findings that ownership had an influential and large impact on long-term performance of the IPOs.16 The reason for this was that at some
point, usually a typical long-term period such as three to five years, ownership restriction in terms of selling off stakes would have been lifted. Thus, the sell-off of family or block holdings in IPOs after a long-term period impact negatively on the share price and becomes a large reason for the underperformance of IPOs over the long-term. This finding would seem to be applicable to most firms pursuing IPOs as it would be usually the case that a firm issuing an IPO would have large blocks of holdings controlled by very few entities or personalities.


While a number of research works such as those cited earlier have focused only on the performance of the IPOs, other research works have combined the analysis of the
risk and rewards related to IPOs, which would be parallel to the focus that this dissertation is geared to do. One, in particular, focused on the risk and return trade-off
for IPOs though, admittedly, there was greater focus on how these issuances were riskassessed.A rather focused look on long-run performance showed that industry
parameters, timing of IPO, and industry situation all play in the aftermarket returns of IPOs which, in general, are not favourable.

One of the risks identified in a research work on AIM-listed IPOs was the resulting cost of equity. A decision factor for the firms considering pursuing an IPO should be the cost of equity and the research finding on the assessment of AIM-listed stocks showed that, potentially, cost of equity is much greater than that expected with the listing on these stock exchanges.Using this as an analogy to the current issue of issuing an IPO between Chinese and Hong Kong stock exchanges, it is possible that this is a risk faced by the mainland Chinese firms in their decision.


A factor that needs to be made consistent in the assessment of the performance of the IPOs is the period of assessment. The proper time frame could impact on the
performance considerably and in viewing this assessment, it would be important to have the proper time frame from which to consider returns. For example, flipping of IPOs impact the pricing of some IPOs post the offering and affect the returns if taken within a short time frame.

There is thus a question of the period defined by near-term as well as long-term performance given different periods taken by researchers in conducting their work.
Understandably, this could have been driven by the availability of data of the stock prices. In order to have a proper assessment for this dissertation, it would probably be best to utilise the following time periods: one month for near-term performance, and 3 years for consideration of long-term performance. These seem to be the periods that most of the researchers had utilised though it does differ from some of the period conventions used in other researches.


Despite the existence of numerous research work on the assessment of risks and rewards of IPOs across exchanges globally, there have been limited research works
which focus on the Chinese and Hong Kong IPOs of recent years. One recent unpublished work touched on under-pricing and the aftermarket liquidity of Hong Kong
IPOS, and found that under-pricing was evident in driving liquidity post-IPOs. A more comprehensive published work on Hong Kong IPOs utilised slightly dated figures (IPOs up to 2002) and thus presents a challenge in the findings concluded.22 Another is dated (published in 1998) but does look at the issue of pricing and aftermarket performance of IPOs with results showing large returns accruing in the long-term for IPOs.

Other China-related research work focus on performance post-IPO but refer to operating performance of the firms and not the performance of the share price.One
research which looked at short-term and long-term IPO performance in China highlighted a number of differences affecting Chinese stocks: stake that the government has in the firm, the size of the firm, and the options available to Chinese investors.

Over the next few years, there will continue to be increased interest in the IPOs of firms in mainland China as these firms seek to tap international investors. In turn,
international investors are increasingly interested in investing in the mainland Chinese firms given their typical profitable nature (largely owing to monopoly or large market
share status) and the presence these firms have in mainland China that international investors find attractive. The pursuit of the IPO by the mainland Chinese firms is partly driven by the need to diversify ownership risk, particularly for the mainland Chinese firms which are predominantly state-owned enterprises (SOEs).

Thus, despite extensive related research, there is still scope to pursue this dissertation as it provides further evidence of the risk and reward assessment of IPOs.


The approach to the dissertation followed an explanatory research approach. This approach was deemed to be the best approach to address the research questions,
particularly with the requirement of discovery of insights and ideas. The research approach relied on both extensive primary and secondary research providing a
complementary basis for conducting the assessment and analysis of the issues in the research.

This section is structured as follows:

· Research analysis and approach.

This part describes the overall research approach utilised in this dissertation and the methods of analysing the information retrieved
from primary and secondary research methods.

· Primary research.

This discusses the primary research undertaken in this dissertation, including the objectives in the methods used.

· Secondary research.

This presents the use of secondary research and the complementary approach to the primary research tools.

· Research limitations.

In the conduct of the dissertation research, a number of limitations presented itself which impacted on the results of the dissertation. These are explained in this part.

· Ethical considerations.

This part goes through the key ethical considerations in the process of completing the dissertation.


The dissertation was conducted using a problem-solving approach. This methodology was used in assessing the quantitative results from the statistical analysis
and also in analysing the results of the in-depth interviews, and secondary research. The dissertation utilised a combination of desktop analysis (the statistical analysis and
quantitative assessment of the performance of IPOs in various stock exchanges), input from industry practitioners (the qualitative assessment of risks of the IPOs), and desk research (primarily for the secondary research and in providing further support to the results of the statistical analysis and qualitative assessment).

The assessment of the performance of the IPOs was conducted using descriptive statistics as these allowed for an objective comparison of the performance (or returns) of the IPOs. Descriptive statistics was also used to show other relevant trends related to the performance of the IPOs from the Chinese and Hong Kong stock exchanges, and also the comparison versus other regional and global stock exchanges.

After the assessment and analysis, and with the preliminary results on-hand, the research findings were tested and reviewed in the ‘market’ through discussions with other stakeholders to ensure that these research findings were sound and logical. The market review also provided feedback and confirmation of the possible research contribution that the dissertation provides. This has been noted as part of the findings and analysis section.


The key primary research utilised in this dissertation involved interviews with industry practitioners involved in Chinese and Hong Kong IPOs. The objectives in this primary research method were to:

(1) understand the key risks for firms pursuing their firms’ listing in the Chinese and Hong Kong stock exchanges, and (2) determine the perception of the industry practitioners as to the relative performance of IPOs being done in the Chinese and Hong Kong stock exchanges. The interviews were conducted to get an understanding of the key risks that firms are exposed to by pursuing their IPOs in Chinese and Hong Kong stock exchanges. The use of in-depth interviews was selected as
the primary research method as this provided an opportunity for the researcher to gain deeper insights into the issues focused on.

It was initially planned that in-depth interviews of various stakeholders in the industry would be pursued in order to have a good breadth and depth in understanding the
key risks and to get input from a diverse set of stakeholders. However, the research limitations in terms of timing, access to various stakeholders, and leverage of contacts in the Chinese and Hong Kong financial services sectors provided a hindrance to having an extensive list of industry practitioners included in the primary research.

Nevertheless, the researcher was still able to have several in-depth interviews and these provided a good indication of the overall viewpoints currently existing in the industry, particularly related to the risks that exist for firms.


The secondary research for this dissertation involved two key approaches:

(1) statistical analysis of stock price performance of selected IPOs in the Chinese and Hong Kong stock exchanges as well as several regional and global stock exchanges, and

(2) desk research to understand the viewpoints currently existing on the performance and risks of IPOs in Chinese and Hong Kong stock exchanges.

5.3.1 Statistical Analysis

The first secondary research method involved the quantitative data analysis of the performance of the IPOs in the Chinese and Hong Kong stock exchanges. This analysis
effectively supported the assessment the performance of the listing in these stock exchanges to determine if there were differences in the performances of IPOs for these

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