Hybrid Public Offerings In China: The Case Of Class B Shares

Abstract

When raising equity capital through the recently opened Shanghai stock exchange, Chinese companies can issue stock to Chinese nationals (A shares) or to non-Chinese nationals (B shares). Between 1990 and 1996 40 issuances of B shares took place, often by firms that had previously issued A shares. These class B initial offerings are found to exhibit underpricing relative to first day trading prices, but to a much less severe degree than class A share IPOs. Indeed, the extent of underpricing of class B shares is found to be in line with underpricing in the U.S. This is surprising because for the most part these offerings are hybrids of IPOs and seasoned equity offerings, representing offerings of old (traded) claims in a new market setting. We examine a variety of standard explanations for underpricing of IPOs finding either no empirical support for the hypotheses, or that many of these explanations are not relevant to the characteristics of the Chinese market.

Two features of Chinese IPOs particularly seem to set them apart from new issues in the U.S. First, the capital market is not fully established, and second, the issuer of all IPOs is the government. The Chinese IPOs represent an attempt to transform a non-market economy, therefore, the prime objective may be the very creation of a viable market mechanism rather than a mere maximization of issue proceeds. We examine whether underpricing may be explained by this desire by the government (who also happens to be the issuer) to establish a market, and suggest a variety of lines for future research to cast further light on this hypothesis.