This study examines
initial public offering (IPO) underpricing and long-run aftermarket performance
in Hong Kong using a sample of 598 IPOs listed on the Stock Exchange of Hong
Kong (SEHK) between 2006 and 2013. IPO performance is measured using initial returns,
raw returns, and market-adjusted returns over holding periods of up to two
years. The study further investigates whether IPO performance varies by listing
year, subscription ratio, and the final offer price’s position within the
indicative price range. The results indicate that IPO underpricing remains a
significant feature of the Hong Kong market. The average first-day return is
16.2%, suggesting substantial initial gains for investors. However, these gains
are not sustained, as IPOs generate an average two-year market-adjusted return
of approximately −8%, indicating significant long-run underperformance. This
pattern suggests that initial investor optimism leads to temporary
overvaluation, followed by subsequent price corrections. Cross-sectional analyses
show that IPOs issued during periods of high issuance activity, those with
higher subscription ratios, and those priced closer to the upper bound of the
filing price range generate stronger initial returns but weaker long-run
performance. These findings support the asymmetric information, ex-ante
uncertainty, investor sentiment, hot issue market, and partial adjustment
hypotheses. Overall, the study provides evidence that strong investor demand
contributes to IPO underpricing while increasing the likelihood of long-run
underperformance in the Hong Kong market.
