Dec.2001
Volume 1, No.1 (Serial No.1)
Chinese Business Review, ISSN 1537-1506
China Business Review(Journal),Inc.,USA
Shell Resource and IPO Underpricing：
An Empirical Study in China’s Stock Market1
Dan Yang 
Abstract: The article intends to explain in China’s new issue underpricing based on the special systematic
arrangement in China’s security market. The governmental regulation brings about the unique “shell resource” in
China’s security market. The issuing firm gets the permission of new issue, i.e. the “shell resource” in the primary
market through rent-seeking process, and cashes out in the secondary market, this is the fundamental factor which
drives up the initial return. “Shell resource” can be indicated by the proxies as : scarcity of shell resource, IPO size,
lottery, the gap between issuing and listing. Empirical study supports our explanation.
Key words: new stock issue IPO underpricing shell resource empirical study China’s security market
During the process of Initial Public Offering(IPO) of stock, the abnormally high Initial Returns(IR)2 are
documented by the empirical studies in different countries. And these studies also supply several explanations
based on the information asymmetry3. Since 1990’s, many Chinese scholars began to implement the empirical
study methods to study the short-term pricing performance of the newly issued stock. However, they have neither
described the new issue phenomenon accurately nor supplied the sensible explanation based on the special
institutional arrangements in China’s stock market, owing to the lack of methodology, database and theorem. The
article tries to explain the new issue’s price performance based on the unique phenomenon- “Shell Resource” in
China’s stock market, and gives out relevant empirical proofs based on the large sample.
1. Literature review
1.1 Empirical proof
IPO underpricing exists in different countries’ stock markets（Loughran，Ritter and Rydqvist 1994）, and the
underpricing in China’s stock market could rank the first in the world, many researchers observed the marvelously
high initial returns as follws:
Author
Publish
Time period
Sample size
Average Initial Return
This paper is revised from a part of the author’s doctorate dissertation draft ” Research on Shell Resource and New Issue Pricing ”.
As a circulation paper of Guanghua Forum-Doctorate Forum as Southwestern University of Finance and Economic, the participants
supplied instructive advice. The author acknowledge the Professor Guo Fuchu, Professor Zhao Dewu, Professor Yang Xiaowei,
Professor Feng Yongfu，Professor Shi Daimin, Professor Xie Xiaoyang and Dr. Li Dongping for their help. Dr. Zhu Hongjun gave an
interesting remark during the 2002 annual meeting of Chinese Accounting Professor Symposium。
Dan Yang, Ph. D and Vice dean of MBA Education Center at Southwestern University Of Finance and Economics (SWUFE). His
research interests are IPO, Corporate Finance Theory, China’s Capital Market and Asset Pricing. He ever studied MBA in Berlin
School of Economics and also finished studying one-year finance courses at Ph. D level in Baruch College, City Univ. of New York.
Email: yangd@swufe.edu.cn; Chengdu,Sichuan Province, P. R. China, 610074,Tel: 13908057684;
2 Initial Return is defined as the percentage return between the issuing price and the first day’s close price.
3 refers to “The New Palgrave Dictionary of Money & Finance” Vol. 2, p.250, The Macmillan Press Limited 1992 .
1
1
Shell Resource and IPO Underpricing：An Empirical Study in China’s Stock Market
Su and Fleisher
Wang Jinbing
ed year
1997
1997
before 1996.1
1997.1.8-1997.
6.27
308 A- share
52 A- share
Chen Gongmeng and
GaoNing
Liu Li and Li Wende
2000
1992 －1996
480 A- share
948.59%
abnormal return adjusted by
deposit interest rate
2.702%
335%
2000
472 A- share
142.84%
DuShen, Liang HongYun
& Song Fengming
2000
594 A- share
472 A- share
adjusted by contribution risk
3.05%
Liu Tong & Wu Shinong
2001
1995.1.1-1998.
5.30
Before 1998.5
1995.1.1-1998.
5.30
1996.1-1998.6
96 A- share
120%-220%，
1.2 Theoritical explanation
Many empirical studies on the new issues in China support the “Signaling” hypothesis. i.e. The IPOs in
China are intended to open the channel to capital market, the issuers underprice the new issue stock in order to
draw attention from the investors and make the investors realize the firms’ potential value, which will make the
Seasoned Equity Offering (SEO) easier. Su and Fleisher (1998),Su(1999), Gongmeng Chen and Ning Gao (2000)，
Zongde Han and Jing Chen（2001）supplied the proof explaining the relationship between the IPO and SEO.
These proofs indirectly proved that the fundamental function of China’s stock market is to finance the
State-Owned Enterprises(SOEs).
Contrary to the Signaling hypothesis, Shen Du, Hongyun Liang & Fengming Song（2000）indicated by
empirical study that signaling mechanism does not work in the A-share market in China, they believed at the early
stage of security market development, China adopted the quota system for new issue, the limit of quota made the
supply relatively insufficient compared to the high demand, this was the major reason of underpricing.
Fengming Song and Hongyun Liang（2001）observed the IR for 95 IPOs after the China’s Security
Regulation Commission(CSRC) cancelled the regulation on the issuing P/E ratio. They found the IRs for
individual stock were still high, so that they believed that the major factor affecting the IR came from the
secondary market. They further indicated that the signaling hypothesis ignored the difference between the China’s
security market and the foreign security market. In common law countries, they apply the authorized capital
system; issuing company can decide the scale and timing of issue very freely. However, China applies statutory
capital system, the SEO is independent from IPO, the scale and timing is under restriction, the issuer should meet
several requirements such as three years’ 6% Return of Equity(ROE) and apply for the permission before SEO.
The issuer has no incentive of underpricing the IPOs.
Jinbing Wang (1997) explained the abnormal IR for the governmental ratification system during the process
of IPO. Hui Meng (2001) believed the complicated arrangement of different shares categories4 and the quota
control on the scale of new issues drove up the IR. Tong Liu & Shinong Wu（2001）believed the underpricing of
IPO stemmed from the information asymmetry among relevant participants.
1.3 The weakness of existing explanationes
4
In China, the share are divided into three categories according to the contributor of new issue: state-owned shares, corporation
share and individual shares, the three kinds shares have the same voting right, but only individual shares can circulate in the
Shenzhen and Shanghai exchanges so individual share is also called as circulating share. In China, the individual shares issued in
China is called A-share, the share issued to foreigners in China is called as B-share, the share contributed by the Hongkong residents
and listed in HK is called as H-share, share contributed and listed in New York is called as N-share, and so on.
2
Shell Resource and IPO Underpricing：An Empirical Study in China’s Stock Market
The existing explanations make some sense, however, they can not reflect the special arrangement of China’s
security market. In general, the weakness is as follows:
Firstly, many explanations adopted the signaling hypothesis, ignoring other hypothesis’s explanation power.
The foundation of signaling hypothesis is that the issuer has very stable expectation, and the will as well as
conditions to attune the short term and long term interests. However, in China’s security market, the following
factors increase the uncertainty of signaling: the underpricing issuer can not surely get the permission of SEO5；
Issuer manipulates the financial earning, the small and intermediate investors are lack of the necessary knowledge
and ability to tell the truth; The security market’s system is under very quick transformation, which brings about
expectation uncertainty.
Secondly, existing explanations concentrate on the behavior of listing companies ,ignoring the analysis on
other subjects’ behavior such as investment bank, investors, government. These participants’ behavior has relevant
influence on the pricing of IPO.
As to the investment bank, Baron (1982) supplied a hypothesis based on the information asymmetry. He
believed the underwriters could use its information advantage over the issuer to underprice the IPOs in order to
shirk from the marketing efforts and make good “fame ” among investors. In China, owing to the high return
and low risk in the primary market, the underwriting responsibility of investment bank becomes less important,
the underwriter’s major duty is to get the quota of issuing and completing the necessary paper work. This reality
enforces the ignorance of relevant research on investment bank behavior.
Investors especially the institutional investors’ behaviors affect the pricing of IPO significantly. Welch（1992）
explained the investors’ behavior with Cascades effect and Chemmanur (1993) instructively supplied a dynamic
model with information production, we still need the empirical research to test the adaptability of these hypothesis
in China. However, due to the similarity of investors’ behavior and lack of data, the research on investors’
behavior leaves a lot to achieve.
Since the government duplicates the systematic transformation of the security market, it affects the
systematic design and the actual implementation of the security institutions. Dan Yang (1999) demonstrated that
the government acted dual roles: As a market manager, allotted the issuing quota, and decided the issuing price
through the regulations on issue scale of and the issue P/E ratio; As the owner of the state-owned assets, sell out
equity through the stock market. As the market manager, it intended to improve the efficiency of the market, as the
owner, it intended to raise the issuing proceeds and exclude other company from getting the issue permission. All
the deep-in conflicts of China’s security market stemmed from the dual roles of the government. Existing
researches only touch the analysis of governmental regulation when they tried to explain the underpricing, such as
the researches by Shen Du, Hongyun Liang & Fengming Song (2000), Fengming Song & Hongyun Liang (2001).
The signaling hypothesis totally ignored the governmental analysis. In the point view of the author, only if the
governmental activity analysis is adopted could we find a convincing explanation on new issue underpricing,
which reflects the special security market environment in China.
Thirdly, as the output of the governmental regulation, the permission of new issue and listing is very scarce
resource. The issuer and the investment bank get the permission (issuing quota) through rent-seeking process, and
in fact, they acquired the potential value from the primary market, which is called “Shell Resource”. The “Shell
5
The restrictions on SEOs are the usage of fund, time interval between IPO and SEO, ROE of issuing company and so on, refer to
the Li Shuhui(2001),SWUFE doctorate dissertation “Empirical Study on the SEO in China”.
3
Shell Resource and IPO Underpricing：An Empirical Study in China’s Stock Market
Resource”is converted into important part of the stock premium in the secondary market. The stock price surely
tends to increase due to the value of “Shell Resource” in spite of the asset quality of the company. The author
believes that the “”Shell Resource” results in the large spread between the primary market and the secondary
market, which brings the very much high IR (underpricing). “Shell Resource” can be viewed as the result of
governmental regulation and kind of allowance for the winner of getting permission from CSRC; it also can be
seen as the specific indicator of the governmental role of asset owner. Pitifully, many scholars(Su and Fleisher
1997, Gongmeng Chen and Ning Gao 2000, Shen Du, Hongyun Liang & Fengming Song 2000, Dongping Li
2001, Hui Men 2000, Tong Liu & Shinong Wu 2001, Fengming Song & Hongyun Liang 2001) had realized the
importance of the governmental behavior but did very little in-deep research on it. They found neither proxy for
the governmental behavior nor the relevant empirical proof. And nobody ever tried to explain the underpricing
with the regulation product “Shell Resource”, which leaves a lot to achieve in the future.
2. IPO underpricing:“Shell resource” hypothesis
2.1“Shell resource” and IPO underpricing
2.1.1 the Definition of Shell Resource
Generally, shell resource means the listing qualification of issuers; the value of shell resource in the
secondary market is the realized value of it. Shell resource of the issuer’s stems from the restriction and
management in security market centered on quota system, which results from the governmental interference. It
will remain for long time in the course of economic transformation.
Judged from the rent-seeking theory, governmental ratification system and control of quota are the
continuance of planning economic management style in the security market, in order to deal with contradiction
between demand and supply in stock issuing. However, in fact, it’s a typical behavior of governmental
rent-creation, which leads to the scarcity of shell resource. Once permitted to come to market, the issuers can
obtain profitable interests. For example, they take advantage of security market to raise money, to advertise and to
gain governmental privilege. Therefore, potential issuers will manipulate resource to seek for nonproductive profit
activities, which is rent-seeking. It won’t grind to a halt unless issuing profits are bigger than rent-seeking costs.
When a firm wins quota, it gains the issuing shell resource and then, through asset restructure, meets issuing
requirements and raises the price as possible as it can. Not only can the firm offset the costs, but also it can obtain
profitable rewards if selling out its stock in the secondary market.
As to those companies that can’t get quota in primary market, it is realistic for them to “buy shell resource
and list” in the secondary so as to shunt quota management and look for convenient channel to capital market.
2.1.2 Performances of Shell Resource in the Market
Acquirement of shell resource is the result of centrally and locally governmental ratification of CSRC. It
symbols with the usage of issuing quota in primary market and with the successful listing of stock. But it doesn’t
mean that shell resource is marketable because it hasn’t been the transferable scarce resource. Only if shell
resource is open to the market, it has practical value. In this sense, the large spread in price between primary
market and secondary market can be partly considered as the cash-out result of shell resource. This article also
holds its opinion on basis of the value of shell resource to explain the abnormally high IR in China.
The author believes the basic market performance of shell resource is that it’s transferring value in the
secondary market helps issuers obtain relatively high stock price, regardless of their capital quality, and then
brings the abnormally high IR. That is to say, shell resource provides listing companies with “value support” and
4
Shell Resource and IPO Underpricing：An Empirical Study in China’s Stock Market
lower price is not available. Exampled as the listing company-Zheng Baiwen , the firm has been in deficit: net
capital was –6.9 Yuan per share in 2000 and -6.2 Yuan in 2001. However, Shandong Sanlian Group still decided to
invest and paid 300,000,000 for debts valued 1,500,000,000 that Baiwen Zheng owed to Chinese Xingda Asset
Management so that Sanlian group can list through buying shell resource. Presuming the strategy is reasonable
enough and considering the deficit, we can conclude that shell resource of Baiwen Zheng is above 300,000,000.
The existence of shell resource generates a platform for new issue. No matter how unprofitable the firm is, no
matter how poor the real management and achievement is, even no matter if it has potential future, there will be a
considerable rise up after listing. Huge profit attracts application and purchase in the primary market, which gave
birth to a China’s characteristic mystery of new issue pricing- the primary is with low risk but with very high
profit..
2.2 Proxies’ for Shell Resource
Theoretically, we can find independent variables of shell resource. After our regression model enrolled all the
explanative variables of shell resource, if there is still any statistic distinction both in regression intercept and
IR.Then we can say, the revenue rate represented by the constant is the added value brought by shell resource. In
this way, we find independent variables representing value of shell resource. But it is very difficult to strongly
prove the prerequisite—to find all possible explanative variables. Consequently, independent variables of shell
resource are impossibly attainable.
As to the second choice, we will try to analyze characteristic of shell resource to find proxies that can
indirectly reflect proxies and have close relation with IR. If we can succeed, a great progress has been made in
explaining the mystery of new issue pricing in china.
Under the background of adopting quota system, we can define the scarcity of shell resource in two ways;
one is the ratio that scale of listing firm devided by the accumulative total scale till listing year (including the
listing year). If the ratio is higher, the scarcity is greater, vice versa. The reason why we take accumulative total
scale instead of scale of present year is that there are 2choices to seek for channels to capital markets: issuing new
stock and buy shell resource to list. For capital rearrangement is largely existing before issuing, these two ways
are substitutable. Scarce degree of quota depends not only on scale of present year but on gross quality of shell
resource in the secondary market.
Nonetheless, it implies that larger companies possess more shell resource value if we take the ratio of scale to
show the degree of scarcity, while according to definition, both the quality and value of shell resource should be
the same. Assuming shell resource as S, i.e. SL large firm owns equals to SS small firm owns; assuming scales of
the two companies are NS and NL respectively, then SL/NL is smaller than SS/NS, in another word, the unit shell
resource value in smaller firm is higher than that in larger one, which impels the price of stock to increase
differently after listed. It is the basic reason that IR of smaller firm is higher than bigger one. According to than
above analysis, this article adopts ratio of listing number to indicate scarce degree of shell resource.
On the basis of analysis, the author believes people should also consider the proxies as followed, which
become statistic items of shell resource:
（1）Gap between stock issuing and listing. This period can also be called as honeymoon of new issue and
proper time of investment for shell resource. Time value and investment risk necessarily produced in the course of
purchasing capital form base line of return. We even can’t disregard risky factors especially while considering the
high risk during system changing period in security market such as deflation in 1995.
5
Shell Resource and IPO Underpricing：An Empirical Study in China’s Stock Market
（2）indicator of issuing size of capitalization.. More often than not, it is more advantageous for purchasers
to trade relevantly to shell resource if the capitalization is smaller. The more convenient resource of small
capitalization used and the lower the cost is, the higher shell resource will be. Though SEO will follow after the
new issued stock, the author believes that the size of newly issued capitalization brings about the base of firm’s
scale, which is hard to change fundamentally in short term. Therefore, the scale of new issue stock can be an
important index of shell resource.
（3）Rate of lottery. Conflict that supply can’t meet demand while issuing results from two stems: one is the
limit of market entrance signaled by quota, the other is the flourishing demand. An important index reflecting this
phenomenon is the rate of lottery in new issue. The lower the rate is, the more distinct the conflict will be. Rate of
lottery mirrors scarce degree of shell resource and its value.
In fact, many scholars have found proofs through their empirical studies respectively that shell resource
exists and influences IR. For example, Su and Fleisher have proved smaller scale of issuing is coupled with higher
IR with which issuers are prone to carry out larger scale of SEO; they also proved that new issue underbracing
degree is higher in initial forming period, which can be viewed as an indirect demonstration: both the value of
small capitalization and shell resource are changed with time. Su & Fleisher, Tong Liu and Shinong Wu pointed
out that information new issue stock disclosed couldn’t explain underpricing degree. However, it’s a pity that they
couldn’t answer the questions as: under the premise that firm’s self-information can’t explain the new issue
underpricing, what results in abnormally high IR of IPO?
2.3 Hypothesis System based on Shell Resource
Hypothesis cored with shell resource is as followed:
(1) Hypothesis on scarce effect of shell resource. Yearly quota scarce degree leads to the difference between
values of shell resource. It can be indicated by index of scarce shell resource: the higher the degree is, the higher
IR will be.
(2) Hypothesis on “Small Capitalization Effect” of new issue underpricing. Smaller firm has higher shell
resource value than bigger one. As a result, underpricing degree of smaller firm is higher.
(3) Hypothesis on “Honeymoon Period” effect of new issue underpricing. The larger gap between issuing and
listing, the higher underpricing degree will be, i.e. invest period of shell resource is positively related to profits
(4) Hypothesis on supply-demand effect of new issue underpricing. If a stock has lower rate of lottery, its
conflict between supply and demand will be more intensive, and shell resource will be more valuable,
consequently, underpricing will be higher.
3 Empirical Test Model
According to analysis above and hypothesis system as well as conferring existing test models, we can put
forward a model to analyze IPO underpricing:
Model1：IR= α +β1*PE +β2*IPOSIZE+β3*IPOPRC+β4*INDCD+β5
*LSTPLC+β6*GAP+β7*SCARCE+β8*ROE+ε
Proxies are defined as：
IR: Initial Returns equals to initial closing price minus IPO price then divided by issuing price. Because the
average market returns have a long way to near average IR, the result won’t be influenced while adjusting IR by
market returns or not. Therefore, this article chooses simple IR to analyze.
PE: Issue stock’s Price/Earning ratio.
6
Shell Resource and IPO Underpricing：An Empirical Study in China’s Stock Market
IPOSIZE：Initial Public Offering Size Unite with one thousand stocks and take it’s logarithm.
IPOPRC：Initial Public Offering Price
INDCD：Industry dummy variable，multiple-linear effect is eliminated by statistical arrangement.
LSTPLC：Dummy variable for the listing place. if the stock listed in Shanghai the value is 1, for companies
listed in Shenzhen, the value is 0.
GAP：Intervals between issuing and listing. Accounted by 360 days.
SCARCE：The scarcity variable for the shell resource, it is defined as the reciprocal of the number of listing
companies by the end of the issuing year.
ROE：The return of equity of the issuer in IPO year
4 Sample Selection and Data Processing
4.1 Examples
The article adopts market and financial data provided by China Security Market Accounting Research
Database—Database of Market Transaction published in 2000 by China’s Accounting and Financial Research
Center in Hong Kong Science and Technology University and Shenzhen Guotaian Information and Technology
Limited Corporation. Owing to incomplete and inaccurate data in our country, the author selects these data for
further comparison and verification in order to guarantee the credibility of data.
The author mainly analyzes A-share’s IPO data both in Shenzhen and Shanghai and handled some obviously
untrue examples technically. For example, Shenzhen Developmental Bank issued A-share (code000001) and listed
on July 3rd, 1991 when there is lack of return ratio data. Considering great importance of these data, the author
kept the examples and substituted with data on July 4th; Huchang Tegang (code 600665) is listed on July 9th,
1993. The data is replaced by that on July 12th. We can take two methods to deal with scarcity of data: one is to
cancel all the records about this stock such as Aishi share (code600652), the other, concerning some significant
data, is to substitute with average of the proxy. To ensure analysis accuracy, we took all achievable examples since
the stock market opened in 1990 as objects. Data intervals and exampled stock numbers are followed as:
Stock Market
Data Interval
Numbers of exampled stock
Shanghai A-share
December 19th ,1990~December 30th ,2000
552
Shenzhen A-share
July 3rd,1991~December 30th ,2000
501
Total
1053
Basic situation of examples is described as followed:
Categorized by Fields：
Industry
Production
Synthesis
Commerce
Public Untility
Real Asset
Finance
Total
Numbers
636
196
101
78
34
8
1053
Ratio（%）
60
19
10
7
3
1
100
Categorized by Listing Location and Issuing Year:
Before
Year
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
Shenzhen
3 1 5 2 1 1 4 1 4 2 1 5 9 1 9
5 8 8
Shanghai
3 11 1 0
9
4 7 4 6 5 1 9
7 8 4
Total
6 2 6 3 1 2 3 1 8 9 5 124 3 8 1 2 172
Categorized by Listing Location and Gap between Issuing and Listing:
1997
106
8 2
188
1998
5 1
5 1
102
1999
4 7
4 6
9 3
2000
4 1
8 3
124
sum
552
501
1053
7
Shell Resource and IPO Underpricing：An Empirical Study in China’s Stock Market
Gap
Shanghai
Shenzhen
Total
Gap≤30
260
209
469
30＜gap≤180
196
210
406
180＜gap≤360
30
15
45
360＜gap≤1080
20
17
37
Gap＞1080
46
50
96
Total
552
501
1053
Categorized by Listing Location and IR:
IR
Shanghai
Shenzhen
Total
IR≤0
3
5
8
0<IR≤100%
175
154
329
100%＜IR≤200%
194
196
390
200%＜IR≤300%
72
52
124
IR＞300%
108
94
202
Total
552
501
1053
4.2 Data Disposal
This article adopts EXCEL2000 and SPSS to analyze data respectively, and contrast with results to ensure
accuracy of research.
4.3 Descriptive Statistics
IR is the main index to mirror IPO underpricing, as well as the major DV(dependent variable) the article
explores. In the light of listed 1053 shares’ IR till the end of 2000 and explanative variables, we can draw the
description as:
Minimum
Maximum
Mean
Std. Dev
IR
-.19
43.80
2.85
4.68
IPOSIZE
.01
1000.00
2.08
31.87
PE
.00
71.45
12.58
9.72
IPOPRC
1.00
100.00
6.46
7.48
LSTPLC
1.00
2.00
1.48
.50
GAP
6.00
4388.00
279.28
701.09
SCARCE
0.00
0.00
0.00
0.00
ROE
.00
6.36
.21
.24
LOTTERY
.00
1.00
0.01
0.06
INDCD1
.00
1.00
0.01
0.08
INDCD2
.00
1.00
0.07
.26
INDCD3
.00
1.00
0.04
.17
INDCD4
.00
1.00
.19
.39
INDCD5
.00
1.00
.60
.49
INDCD6
.00
.00
.00
.00
Judging from the graph above, we can see that the average IR of 1053, IPO companies listing in Shenzhen
and Shanghai since 1990 is 285% underpricing is very obvious. i.e. averagely speaking, initial closing price after
purchasing is almost as much as 3 times, which is marvelous and prehistoric comparing with average gap (285
days) between issuing and listing. It is the basic reason that IPO attracts investors permanently. The highest IR is
Wuhan Zhongshang (code000785), which reaches as much as 43.8 times. IR of 8 stocks is negative, among which
Baida Group’s IR is the lowest (-19%). The big difference of IR Square Deviation indicates diversities between
individual stock pricing and market situation.
Gap between issuing and listing is large. The shortest is 6 days and the longest is 4388 days (almost ten
years). It is related to fast-paced development in the security market in China.
In view of the number of issuing stock, Baogang Share (code 600019) broke its record historically while
issuing new stock, which is much to 18,000,000,000; on the contrary, Huachen Group (code600653) issued the
least which is only 10,000. The average for all companies is 49,000,000.
5 Empirical Results and Analysis
According to the model demonstrated above, we can conclude:
8
Shell Resource and IPO Underpricing：An Empirical Study in China’s Stock Market
R2
0.745
Coefficients
2.438
0.013
-0.051
-0.050
-0.089
-1.210
-461.069
F
14.235
INTERCEPT
PE
IPOSIZE
IPOPRC
GAP
LOTTERY
SCARCE
Adjusted R2
0.735
Significance
***
**
***
***
**
***
***
N
1053
t-Stat
9.068
2.152
-7.450
-2.916
-2.073
-2.602
-4.273
*significant at the level of 10%，** significant at the level of 5%,*** significant at the level of 1%.
After tested, the model is with relatively good application, which significantly backs up the hypothesis about
shell resource. Conclusions are drawn as follows:
(1) Index of scarce degree and IR are clearly exhibited above at the level of 1%, it implies scarce degree is an
important variable to explain IR. The fact is on the side of hypothesis on scarcity. Research also indicated that,
yearly index and IPO underpricing are also significantly related if we use yearly index instead of scarcity index.
Furthermore, the positive regression coefficient shows IR in different years are diverse: the earlier stock issued,
the higher underpricing will be, while scarcity degree is lower and lower with time passing. Individual yearly IR is
as followed:
Year
AverageIR
（％）
Before
1987
631.1
9
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
1661.
19
1115.8
6
1482.
98
775.
18
549.
44
168.
36
82.1
2
77.8
9
115.36
147.
64
131.
63
116.
05
150.
36
Numbers
6
2 6
3 1
2 3
1 8
9 5
124
3 8
1 2
172
188
102
9 3
124
Listing years also affect IR:
Listing
Year
Average IR
（％）
Total
of
Numbers
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
T/A
329.
70
406.
23
413.
42
517.
94
165.
66
609.
40
306.
37
272.
54
319.8
7
114.26
150.8
2
285.95
2 3
1 8
9 5
124
3 8
1 2
172
188
102
9 3
124
1053
(2) IPO underpricing has “small capitalization effect”. Scale is negatively related to IR at the level of 1%
significance, which indicates rise up of new issue of bigger firm lists is lower than that of smaller one. The fact is
on the side of hypothesis that shell resource with different firms’ scale are the same and shell resource per unit in
smaller firm is higher.
(3) IPO underpricing has “honeymoon” effect. Statistics show that gap is closely related to IR: the larger the
gap is, the higher the underpricing will be. On the one hand, as conclusion 1 stated, people issued stock with
larger gap in earlier period. The correlation coefficient between the issue year and the gap variable is 0.67. Among
133 shares with more than one year’s gap, only one was issued in 1998, the others were all issued before 1993; On
the other hand, higher IR can be considered as a compensation to investors in the primary market for their risk and
waiting during “ the honeymoon period”.
(4) At the level of 1%, rate of lottery is obviously negative related to IR. It shows that the higher the rate is,
the lower IR will be; vice versa. Owing to the fact that rate of lottery is prone to lower in contribution of new issue
in China, and above all, issuing price is restricted by government and can’t be altered once fixed, the issuing price
9
Shell Resource and IPO Underpricing：An Empirical Study in China’s Stock Market
can’t be adjusted with supply-demand state. Therefore, stock price in the primary market is lowerly estimated
while the flourishing demand impels stock price in the secondary market. Consequently, the higher IR is
unavoidable.
Moreover, empirical study also shows that there is a clearly statistic relation between IR and P/E ratio over
5 % and the coefficient is negative. It indicates stock with high P/E ratio, may due to restriction of the highest
ratio, is not able to get a reasonable price and so its IR after listed is lean to be higher; The obvious statistic
relation between IR and issuing price over 1% indicates big rise-up of low-price stock after listed. It is likely to
connect with investors’ mentality. Net capital revenue in a firm has no marked statistic relations to IR, which is
consistent with hypothesis of shell resource.
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