Applied Economics Letters

ISSN: 1350-4851 (Print) 1466-4291 (Online) Journal homepage: http://www.tandfonline.com/loi/rael20

An empirical assessment of initial return volatility

in newly listed stocks

Paul B. McGuinness

To cite this article: Paul B. McGuinness (2015): An empirical assessment of

initial return volatility in newly listed stocks, Applied Economics Letters, DOI:
10.1080/13504851.2015.1109035

To link to this article: http://dx.doi.org/10.1080/13504851.2015.1109035

Published online: 16 Nov 2015.

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 APPLIED ECONOMICS LETTERS, 2015
http://dx.doi.org/10.1080/13504851.2015.1109035

An empirical assessment of initial return volatility in newly listed stocks

Paul B. McGuinness
Department of Finance, The Business Administration Faculty, The Chinese University of Hong Kong, Shatin, N.T., Hong Kong

ABSTRACT KEYWORDS
A stock’s first month of listing or ‘seasoning’ is often characterized by sharp volatility in initial IPOs; initial return volatility;
returns. Such volatility is likely to be even more pronounced in initial public offering (IPO) price uncertainty
markets where retail investors exert significant influence. I consider initial return volatility for
IPOs pitched in Hong Kong, where the market organizer requires a sizeable fraction of shares on JEL CLASSIFICATION
offer to be assigned to a retail subscription tranche. Within this context, I examine the pattern G14; G30; G32
and determinants of IPO stocks’ initial return volatility levels over their first 30 days of ‘seasoning’.
I observe that IPO underpricing, market sentiment and float size figure as key explanatory factors.
Results also reaffirm the importance of information asymmetry effects (Ritter, 1984; Beatty and
Downloaded by [Georgetown University] at 17:29 06 December 2015

Ritter, 1986; and Lowry et al., 2010). Larger IPO firms with tighter offer price spreads and more
reputable underwriters exhibit noticeably greater price stability. I also assess Ljungqvist, Nanda
and Singh’s (2006) proposition that underpricing in ‘hot’ IPOs protects issuers and subscribers
against a subsequent fall-off in issuer sentiment. Via analysis of retail tranche share allotments, I
meaningfully extend findings (Jiang and Li, 2013) in this area.

I. Introduction This means that a residual or ‘ex-post’ element of

uncertainty filters into initial secondary market
This short article focuses on the volatility of initial
returns (Ritter 1984; Chen and Wilhelm 2008;
public offering (IPO) returns during a newly-listed
Ljungqvist, Nanda, and Singh 2006; and Falconieri,
stock’s first 30 days of listing. Initial volatility can be
Murphy, and Weaver 2009). In respect of HK, Jiang
extreme during this period. Houston, James, and
and Li (2013) identify trading effects in support of
Karceski (2006) observe that the first month of sea-
the Ljungqvist, Nanda, and Singh (2006) argument
soning is critical in establishing a stock’s fundamen-
of differential pre-and post-IPO sentiment effects.
tal value. Lowry, Officer, and Schwert (2010)
In the initial seasoning period, market values
demonstrate that information asymmetry effects
could deviate significantly from fair value due to
strongly underlie such return variability. In extend-
retail investors’ greater risk of adverse selection
ing this debate, I assess initial return volatility for
(Rock 1986). First and consistent with Ljungqvist,
IPOs pitched in Hong Kong. This setting is of inter-
Nanda, and Singh (2006), retail investors denied
est given retail investors’ significant role in subscrip-
sizeable allocations in ‘hot’ IPOs could flood the
tion and initial secondary market trading. This
initial secondary market with buy orders. Second,
special influence derives from a dual-tranche offer
applicants with overpriced allocations might react
form, earmarking separate retail and book-built pla-
by quickly unloading shares. Extreme volatility may
cing tranches. Subscribers to the retail tranche (RT)
simply arise because of retail investors’ proclivity to
typically receive a large block allocation, ranging
trade exclusively on sentiment. Lock-ups also act to
from 10 to 50% of IPO shares.1
limit corporate and institutional investors’ ability to
Various studies indicate that offer prices only
sell nontrivial holdings (Chen and Wilhelm 2008).
partially adjust for the ex-ante uncertainty (Ritter
Institutions may thus help in softening initial return
1984; Beatty and Ritter 1986) surrounding issuer
volatility. For HK, Jiang and Li (2013) show that
value (Hanley 1993; and Bradley and Jordan 2002).
when pre- to post-market sentiment adjusts from

CONTACT Paul B. McGuinness mcguinne@baf.msmail.cuhk.edu.hk

1
Rule 4.2 of Practice Note 18 (2013; Hong Kong Exchanges and Clearing Limited (HKEx) MB Listing Rules) requires an ‘initial’ RT allocation of 10% of IPO
shares. Rule 4.2 also governs claw-backs, though waivers may apply. RT subscription rates ≥ 100 require RT allocations to rise to 50%.
© 2015 Taylor & Francis
 2 P. B. McGUINNESS
‘high’ to ‘low’, small and large traders’ buy–sell order
flows move in counter-fashion.2
In the present study, market sentiment, float size,
offer price spread, underwriter quality and issuer
size all figure as important determinants of initial
return volatility. I also identify ‘hot’ IPOs via RT
allotments and offer support for the Ljungqvist,
Nanda, and Singh (2006) model of initial returns.
II. Data, descriptive statistics and research
design
I use the standard deviation of a stock’s daily
close-to-close returns over its first 30 days’ trading
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as my dispersion metric. This form contrasts with
variability measures formulated for fixed holding-
periods. For example, and in relation to HK-IPOs,
McGuinness (2014a, 150) reports a standard devia-
tion in initial 30-day holding returns of 21.76%.
Such return variation is not within the 30-day
period but across issuers (see Jog and Wang
(2009) and Lowry, Officer, and Schwert (2010)
for similar approaches). I thus consider return
variability for a given issuing firm. This approach
entails computation of the standard deviation of
successive daily rates of return from first day list-
ing close (t = 1) to the close of trading day p.3
Where p = 30, the volatility measure for a given
IPO firm captures the standard deviation of its
first 29 close-to-close returns. Table 1 reports a
mean volatility value, across all issues (n = 269),
of 3.56%. In respect of an issuer’s first five days of
listing (t = 0 and p = 5; t = 0 is the open of the
first listing day), Table 1 reveals a mean of 5.36%
(n = 269 issues). Volatility drops markedly
(mean = 2.82%) between the 25th and 30th days
of trading (i.e., t = 25, p = 30).
I examine new listings on the HKEx Main Board
between 2005 and 2009. Equation 1 outlines deter-
minants for such stocks’ day-to-day return variabil-
ity (see Tables 3 and 4).
2
The correlation they report (p. 78) of −0.0038 relates to the first day open–close return and is not statistically significant. They report that both flows bear
significant positive correlation when pre- to post-sentiment remains ‘high’.
3
It is akin to Ritter’s (1984) ‘ex-post uncertainty’ measure (see Falconieri, Murphy, and Weaver 2009, 293, for ex-post proxies).
4
For useful review, see Jog and Wang (2009, 232). HK-based evidence also suggests a link between volatility and retail subscription rates (see Vong 2006; and
McGuinness 2009).
5
The present study does not consider post-IPO firm performance (see McGuinness 2014b for recent assessment of long-run accounting and stock returns).
6
They focus on the variability of issuers’ initial 21-day holding returns for months of varying IPO activity. They also indicate (p. 452–3) some level of
consistency with Pastor and Veronesi (2005).
Volatilityi ¼ α0 þ α1  Underpri
þ α2  PosMkt1i þ α3  NegMkt2i
þ α4  PosMkt4i þ α5  HRi
þ α6  Activityi þ α7  Retentioni
þ α8  Sizeq1i þ α9  Sizeq2i
þ α10  Sizeq4i þ α11  Sizeq5i
þ α12  OPspreadi þ α13  QualUwri
þ α14  Stablzni þ ei
(1)
Related empirical evidence suggests a positive link
between offer discount (Underpr) and the variability
of initial secondary market returns (Volatility).4
Underpr captures the market-adjusted run-up between
final offer price and first market open. It does not
account for subscribers’ financing cost or issuer’s sub-
scription fund interest (see Fung and Che 2009 for
discussion).5
For overall market sentiment, I define four sub-
periods. PosMkt1 captures the bull market preceding
the Global Credit Crunch (01/01/05–31/10/07) and
NegMkt2 and NegMkt3 the bearish market conditions
for sub-periods prior and post the Lehman debacle (01/
11/07–08/09/08; and 09/09/08–31/03/09). Dummy
PosMkt4 identifies resurgent sentiment in the final
eight months of 2009. For primary sentiment, I identify
the number of issuers listing five days either side of a
given firm’s own IPO (Activity). Lowry, Officer, and
Schwert (2010) demonstrate greater return dispersion
in more active months.6 An IPO firm’s public float
may also impinge on return volatility. Greater return
volatility is likely where shares are more ‘scarce’
(Loughran and McDonald 2013, 313). I thus posit a
negative relation between Volatility and the inverse of
public float, Retention.
Accounts like Ritter (1984), Beatty and Ritter
(1986) and Lowry, Officer, and Schwert (2010) stress
the importance of information asymmetries on
initial pricing. I posit that the information gap
 APPLIED ECONOMICS LETTERS 3

Table 1. Descriptive statistics of newly listed stocks’ initial return volatility.

N Minimum Maximum Mean SD
Volatility(0→5) 269 0.53 37.22 5.361 4.023
Volatility(1→5) 269 0.20 23.27 4.264 3.196
Volatility(5→10) 269 0.44 13.29 3.339 2.321
Volatility(10→15) 269 0.32 19.48 3.063 2.117
Volatility(15→20) 269 0.41 9.27 2.831 1.696
Volatility(20→25) 269 0.27 13.40 2.793 1.746
Volatility(25→30) 269 0.28 12.81 2.818 1.821
Volatility(1→10) 269 0.65 17.50 4.048 2.401
Volatility(10→20) 269 0.59 13.35 3.137 1.643
Volatility(20→30) 269 0.55 9.63 2.970 1.439
Volatility(1→30) 269 0.96 9.98 3.563 1.500
Notes: Volatility(0→5):Standard deviation (SD) of daily returns for first five days’ listing. The first market-adjusted return is first-day
open to first-day close; subsequent daily returns are close-to-close.
Volatility(1→5): SD of daily close-to-close returns between 1st and 5th days of listing (dol).
Volatility(5→10): SD of daily close-to-close returns between 5th and 10th dol.
Volatility(10→15): SD of daily close-to-close returns between 10th and 15th dol.
Volatility(15→20): SD of daily close-to-close returns between 15th and 20th dol.
Volatility(20→25): SD of daily close-to-close returns between 20th and 25th dol.
Volatility(25→30): SD of daily close-to-close returns between 25th and 30th dol.
Volatility(1→10): SD of daily close-to-close returns for first 10 dol.
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Volatility(10→20): SD of daily close-to-close returns between 10th and 20th dol.

Volatility(20→30): SD of daily close-to-close returns between 20th and 30th dol.
Volatility(1→30): SD deviation of daily close-to-close returns for first 30 dol.
Daily returns, between close trading dayt ‒ 1 and close trading dayt:
= {[(Closing price dayt – Closing price dayt ‒ 1)/Closing price dayt ‒ 1)
-((close in HSI dayt – Close in HSI dayt ‒ 1)/Close in HSI dayt ‒ 1)]}*100
Where HSI is the Hang Seng Index.

between insiders and IPO subscribers is decreasing III. Principal findings

in issuer size and underwriter quality but increasing
Table 4 reports least squares regression results. All
in offer price spread. First, larger firms are likely to
regressions feature the White (1980) adjustment.
be more visible and possess a stronger track record
Overall results reveal strong support for IPO under-
of earnings, making their valuation less uncertain.7
pricing as a determinant of return volatility.
Given possible nonlinearity, five dummies feature
Similarly, secondary market sentiment variables
(Sizeq1-5). Second, a wider offer price spread likely
strongly correlate with volatility at 10- and 30-day
connotes greater pricing uncertainty. Third, as
horizons. Results suggest that strong secondary mar-
argued in Beatty and Ritter (1986), uncertainty
ket sentiment (PosMkt1 and PosMkt4) suppresses
should be decreasing in underwriter quality
volatility. Likewise, volatility bears strong association
(QualUwr).
with primary market sentiment (Activity). Results
Global coordinators’ on-market purchase activities
are thus congruent with greater return volatility in
(Stblzn) may temper volatility. Around one-third of
‘hot’ markets (Ritter 1984).
IPOs faced such intervention. Permitted stabilization
Table 4 results (for Volatility1→30) suggest
ends on the 30th calendar day after retail close. As
greater price resilience in issues with larger floats
retail close typically occurs one week ahead of listing,
(i.e., smaller Retention levels). Findings also offer a
stabilization terminates around the 23rd calendar
broad level of support for information asymmetry
(17th trading) day of listing.8 Finally, control features
effects. Larger issuers (i.e., those in the highest quin-
for state-backed issues (HR).
tile of total assets) experience markedly lower return
Tables 1–3 set out descriptive statistics and bivari-
volatility. This result holds for both Volatility1→10
ate Pearson correlations. For explanatory variables,
and Volatility1→30. Table 4 results for
multicollinearity appears at low levels. For variable
Volatility1→10 also suggest support for information
construction, I utilize issue documents and IPO
asymmetry effects via OPspread and QualUwr.
announcements posted to HKEx’s website. For
Thus, issues with narrower offer price spread and
stock and index price data, I utilize Datastream.

7
Gross proceeds may serve as an ex-ante uncertainty proxy (see Falconieri, Murphy, and Weaver 2009, 287).
8
See Mazouz et al. (2013) and McGuinness (2014a) for discussion of arrangements governing stabilization in HK.
 4 P. B. McGUINNESS

more reputable underwriters experience significantly

Trv30/
Trv1
0.04
0.02
0.42
0.00
0.05
lower volatility, especially for the first 10 days’ list-

269
ing. Weak correlations between total assets,
OPspread and QualUwr suggest that the three

Trv10/
Trv1
0.08
0.05
1.77
0.00
0.13
269
dimensions capture different aspects of information
asymmetry. Results also indicate lower variability

Underpr PosMkt1 NegMkt2 PosMkt4 HR Activity Retention Sizeq1 Sizeq2 Sizeq3 Sizeq4 Sizeq5 OPspread QualUwr Stablzn
(Volatility1→30) in state-owned firms (HR) relative

0.36
0.00
1.00
0.00
0.48
269
to privately controlled entities (1-HR).
1.43 Only marginal change occurs after the inclusion
2.00
3.00
0.00
1.18
269
of Stblzn (see Table 4, columns 2 & 5). The only
noticeable effect is a drop in the significance level of
23.09
23.63
66.67
0.00
10.50
269
Underpr. Columns 3 and 6 of Table 4 include addi-
tional control for trading volume change. Trv10/
0.20
0.00
1.00
0.00
0.40

Trv1 (Trv30/Trv1) captures the ratio of an issuer’s

269

trading volume on the 10th (30th) trading day to

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0.20
0.00
1.00
0.00
0.40
269

first listing day. I utilize trading volume in a similar

way to Jiang and Li (2013) as a proxy for Miller’s
0.20
0.00
1.00
0.00
0.40
269

(1977) opinion divergence argument. Table 4 results

strongly support this contention.
0.20
0.00
1.00
0.00
0.40
269

I investigate Ljungqvist, Nanda, and Singh’s

(2006) proposition of sequential and opposite senti-
0.20
0.00
1.00
0.00
0.40
269

ment effects in ‘hot’ IPOs. I identify ‘hot’ issues as

those subject to severe rationing. RT subscription
72.18
72.29
95.00
47.18
6.12
269

rates, as employed in Jiang and Li (2013), offer one

indicator of sentiment. However, by incorporating
0.21 2.11
0.00 2.00
1.00 9.00
0.00 0.00
0.41 1.88

clawback adjustment, share allotments in disclosed

269

RT ballots offer a more precise measure. I focus on

269

the percentage of shares allotted retail applicants at

the minimum order level (Alloc).9 I judge ‘crowd-
0.20
0.00
1.00
0.00
0.40
269

ing-out’ effects to be severe where Alloc ≤25%.

AllocD receives value one in such cases (n = 77).
0.14
0.00
1.00
0.00
0.35

Table 5 highlights stronger underpricing and first-

269

day returns where AllocD = 1. However, such issues’

returns turn strongly negative between first day close
0.62
1.00
1.00
0.00
0.49
269

and 10th (and 30th) listing day close. Such findings

support Ljungqvist, Nanda, and Singh’s (2006) con-
13.67
6.96
129.87
−25.25
21.68
269

tention that substantial underpricing in ‘hot’ IPOs

protects issuers and subscribers against declining
Table 2. Descriptive statistics.

(1→30)

after-market sentiment. Finally, return volatility

Volat

3.56
3.37
9.98
0.96
1.50
269

and volume change are little different across

AllocD (0,1) values.
(1→10)
4.05
3.54
17.50
0.65
2.40
Volat

269

IV. Concluding comments

Std.Dev
Median

My analysis confirms (1) the presence of extreme

Mean

Max.
Min.

return volatility in a stock’s first few days of listing

9
Variable has mean 56.25% and SD 36.72% (n = 269). To illustrate, see Country Garden’s IPO Allotment Results announcement, 19/04/07, Summary, p. 5,
‘Basis of Allotment’: http://www.hkexnews.hk/listedco/listconews/SEHK/2007/0419/02007/EW102.pdf. Alloc is 25% in this case, for applications of 1000
shares in RT ‘Pool A’.
 Downloaded by [Georgetown University] at 17:29 06 December 2015

Table 3. Pearson correlations.

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15) (16) (17) (18) (19)
(1) Volatility(1→10) 1.00 0.83 0.12 −0.19 0.25 −0.08 −0.13 0.09 −0.07 0.06 0.12 0.08 0.01 −0.26 0.10 −0.19 −0.09 0.23 −0.11
(2) Volatility(1→30) 0.83 1.00 0.11 −0.23 0.29 −0.08 −0.18 0.15 −0.13 0.05 0.14 0.09 0.01 −0.29 0.07 −0.14 −0.06 0.22 0.06
(3) Underpr 0.12 0.11 1.00 0.18 −0.15 −0.05 0.17 0.10 −0.25 −0.04 −0.02 0.10 0.05 −0.10 0.03 0.07 −0.42 −0.04 −0.14
(4) PosMkt1 −0.19 −0.23 0.18 1.00 −0.52 −0.63 0.10 0.06 −0.13 0.07 −0.01 0.03 0.03 −0.13 −0.15 −0.10 −0.18 −0.07 0.02
(5) NegMkt2 0.25 0.29 −0.15 −0.52 1.00 −0.20 0.00 0.01 0.03 −0.02 −0.02 −0.05 0.06 0.03 0.05 0.12 0.24 0.12 −0.00
(6) PosMkt4 −0.08 −0.08 −0.05 −0.63 −0.20 1.00 −0.07 0.01 0.06 −0.11 −0.06 0.06 −0.06 0.18 0.18 0.09 0.04 0.01 −0.01
(7) HR −0.13 −0.18 0.17 0.10 0.00 −0.07 1.00 −0.01 −0.25 −0.23 −0.17 −0.12 0.11 0.41 −0.05 0.28 −0.04 0.14 0.09
(8) Activity 0.09 0.15 0.10 0.06 0.01 0.01 −0.01 1.00 −0.10 −0.10 −0.02 0.07 0.07 −0.03 0.02 0.18 0.02 0.09 0.018
(9) Retention −0.07 −0.13 −0.25 −0.13 0.03 0.06 −0.25 −0.10 1.00 0.08 0.01 −0.15 −0.09 0.17 −0.03 0.01 0.14 0.03 −0.02
(10) Sizeq1 0.06 0.05 −0.04 0.07 −0.02 −0.11 −0.23 −0.10 0.08 1.00 −0.25 −0.25 −0.25 −0.25 −0.14 −0.43 −0.16 −0.12 −0.09
(11) Sizeq2 0.12 0.14 −0.02 −0.01 −0.02 −0.06 −0.17 −0.02 0.01 −0.25 1.00 −0.25 −0.25 −0.25 0.02 −0.28 −0.01 0.09 0.01
(12) Sizeq3 0.08 0.09 0.10 0.03 −0.05 0.06 −0.12 0.07 −0.15 −0.25 −0.25 1.00 −0.25 −0.25 0.07 −0.07 −0.02 −0.03 −0.05
(13) Sizeq4 0.01 0.01 0.05 0.03 0.06 −0.06 0.11 0.07 −0.09 −0.25 −0.25 −0.25 1.00 −0.25 0.04 0.29 0.09 −0.05 −0.05
(14) Sizeq5 −0.26 −0.29 −0.10 −0.13 0.03 0.18 0.41 −0.03 0.17 −0.25 −0.25 −0.25 −0.25 1.00 0.01 0.49 0.10 0.11 0.18
(15) OPspread 0.10 0.07 0.03 −0.15 0.05 0.18 −0.05 0.02 −0.03 −0.14 0.02 0.07 0.04 0.01 1.00 0.06 0.08 0.05 0.02
(16) QualUwr −0.19 −0.14 0.07 −0.10 0.12 0.09 0.28 0.18 0.01 −0.43 −0.28 −0.07 0.29 0.49 0.06 1.00 0.12 0.11 0.12
(17) Stablzn −0.09 −0.06 −0.42 −0.18 0.24 0.04 −0.04 0.02 0.14 −0.16 −0.01 −0.02 0.09 0.10 0.08 0.12 1.00 0.07 0.09
(18) Trv10/Trv1 0.23 0.22 −0.04 −0.07 0.12 0.01 0.14 0.09 0.03 −0.12 0.09 −0.03 −0.05 0.11 0.05 0.11 0.07 1.00 0.12
(19) Trv30/Trv1 −0.11 0.06 −0.14 0.02 0.00 −0.01 0.09 0.02 −0.02 −0.09 0.01 −0.05 −0.05 0.18 0.02 0.12 0.09 0.12 1.00
Notes: Volatility(1→10): SD of close-to-close returns for an issuer’s first 10 days’ listing; Volatility(1→30): SD of close-to-close returns for an issuer’s first 30 days of listing; Underpr: [((Open price first day – final offer price)/final
offer price) ‒ ((Open HSIfirst day – HSIdayt ‒ 5)/HSIdayt ‒ 5)]*100; PosMkt1 (PosMkt4): Dummy for prospectus date between 01/01/05 and 31/10/07 (1/4/09–31/12/09); NegMkt2 (NegMkt3): Dummy for prospectus date
between 01/11/07 and 08/09/08 (09/09/08–31/03/09); HR: Dummy for mainland Chinese-incorporated H-issuers (N = 42) and HKEx-classified ‘Red-Chips’ (N = 14); Activity: Number of IPOs with listing dates five days
either side of issuer; Retention: Percentage of equity retained by insiders after ‘Green Shoe’ expiry; Size: Natural logarithm of total assets recorded in issuer’s prospectus and converted into HKD where necessary (Sizeq1,
Sizeq2; Sizeq3; Sizeq4; and Sizeq5 are quintiles for respective cut-off values 19.93, 20.688, 21.615 and 22.985; OPspread: [(maximum offer price minus minimum offer price)/mid-point]*100 (see Jiang and Li 2013);
QualUwr: Underwriter quality (=3 with two or more ‘big-name’ sponsors; =2 with one ‘big-name’; =1 with two or more regionally-based sponsors; =0 otherwise); Stablzn: Dummy where IPO’s global coordinator
conducts on-market purchases; Trv10/Trv1: Trading volume on 10th trading day/trading volume on first trading day; and Trv30/Trv1:Trading volume on 30th trading day/trading volume on first trading day.
APPLIED ECONOMICS LETTERS
5
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6
P. B. McGUINNESS

Table 4. Least squares regressions of initial return volatility.

(1)Volatility(1→10) (2)Volatility(1→10) (3)Volatility(1→10) (4)Volatility(1→30) (5)Volatility(1→30) (6)Volatility(1→30)
Coeff. t-Statistic Coeff. t-Statistic Coeff. t-Statistic Coeff. t-Statistic Coeff. t-Statistic Coeff. t-Statistic
Intercept 7.116 4.380*** 7.068 4.324*** 7.596 4.704*** 7.461 6.988*** 7.442 6.958*** 7.183 6.793***
Underpr 0.018 2.488** 0.014 1.713* 0.019 2.762*** 0.010 2.363** 0.009 1.813* 0.012 2.778***
PosMkt1 −2.809 −3.277*** −2.741 −3.204*** −2.902 −3.368*** −2.032 −3.979*** −2.006 −3.893*** −2.049 −3.931***
NegMkt2 −0.599 −0.598 −0.435 −0.428 −0.873 −0.898 −0.480 −0.827 −0.417 −0.703 −0.466 −0.801
PosMkt4 −2.603 −3.016*** −2.525 −2.943*** −2.727 −3.144*** −1.846 −3.576*** −1.816 −3.501*** −1.830 −3.483***
HR −0.146 −0.498 −0.147 −0.496 −0.410 −1.387 −0.425 −2.336** −0.425 −2.327** −0.440 −2.501**
Activity 0.168 2.337** 0.170 2.366** 0.142 1.985** 0.138 3.100*** 0.139 3.125*** 0.137 3.182***
Retention −0.014 −0.701 −0.012 −0.604 −0.021 −1.033 −0.033 −2.663*** −0.032 −2.611*** −0.031 −2.534**
Sizeq1 −0.270 −0.486 −0.338 −0.591 −0.224 −0.417 −0.135 −0.438 −0.161 −0.512 −0.126 −0.408
Sizeq2 −0.127 −0.233 −0.132 −0.244 −0.296 −0.586 0.017 0.056 0.015 0.050 −0.009 −0.029
Sizeq4 −0.152 −0.362 −0.124 −0.296 −0.024 −0.060 −0.153 −0.635 −0.143 −0.589 −0.136 −0.571
Sizeq5 −0.970 −2.162** −0.973 −2.148** −0.913 −2.204** −0.637 −2.120** −0.638 −2.113** −0.710 −2.521**
OPspread 0.022 1.834* 0.023 1.890* 0.020 1.651* 0.007 0.847 0.007 0.887 0.006 0.771
QualUwr −0.355 −1.991** −0.349 −1.967* −0.401 −2.514** −0.103 −0.964 −0.100 −0.945 −0.116 −1.109
Stablzn ––– ––– −0.420 −1.313 ––– ––– ––– ––– −0.163 −0.888 ––– –––
Trv10/Trv1 ––– ––– ––– ––– 4.452 6.105*** ––– ––– ––– ––– ––– –––
Trv30/Trv1 ––– ––– ––– ––– ––– ––– ––– ––– ––– ––– 4.203 2.157**
White adj. Yes Yes Yes Yes Yes Yes
N 269 269 269 269 269 269
R2adj. 0.241 0.205 0.259 0.266 0.265 0.282
Notes: Volatilityi = α0 + α1.Underpri + α2.PosMkt1i + α3.NegMkt2i + α4.PosMkt4i + α5.HRi + α6.Activityi + α7.Retentioni + α8.Sizeq1i + α9.Sizeq2i + α10.Sizeq4i + α11.Sizeq5i + α12.OPspreadi + α13.QualUwri + α14.Stablzni + ei
*, **, ***Indicates significant two-tailed t-statistics at respective 10, 5 and 1% levels (see Table 3 for variable definitions).
 APPLIED ECONOMICS LETTERS 7

Table 5. Initial return, volatility and volume levels (for AllocD = 0; Bradley, D. J., and B. D. Jordan. 2002. “Partial Adjustment to
& = 1). Public Information and IPO Underpricing.” The Journal of
AllocDum N Mean SD t-Statistic Financial and Quantitative Analysis 37: 595–616.
Underpr 1.00 77 26.40 27.37 doi:10.2307/3595013.
0.00 192 8.57 16.43 6.56*** Chen, Z., and W. Wilhelm. 2008. “A Theory of the
Ret(Open,1→Close,1) 1.00 77 1.37 11.47
0.00 192 0.57 10.02 0.57 Transition to Secondary Market Trading of IPOs.”
Ret(Close,1→Close,10) 1.00 77 −1.16 18.57 Journal of Financial Economics 90: 219–236. doi:10.1016/
0.00 192 0.17 14.10 −0.63 j.jfineco.2007.08.006.
Ret(Close,1→Close,30) 1.00 77 −8.79 20.70
0.00 192 1.04 21.59 −3.42*** Falconieri, S., A. Murphy, and D. Weaver. 2009.
Volatility(1→10) 1.00 77 4.35 2.55 “Underpricing and Ex-Post Value Uncertainty.” Financial
0.00 192 3.93 2.33 1.30 Management 38: 285–300. doi:10.1111/fima.2009.38.
Volatility(1→30) 1.00 77 3.60 1.49
0.00 192 3.55 1.51 0.26 issue-2.
Trv10/Trv1 1.00 77 0.07 0.07 Fung, J., and S. Y.-S. Che. 2009. Initial Day Return and
0.00 192 0.08 0.15 −0.98 Underpricing Cost in Advanced Payment Initial Public
Trv30/Trv1 1.00 77 0.03 0.03
0.00 192 0.04 0.05 −2.30*** Offerings, Hong Kong Institute for Monetary Research
Notes: See Tables 1 and 3 for definitions. Dummy AllocD = 1(=0) where the (HKIMR), December. Working Paper No. 35/2009.
proportion of shares allotted RT subscribers applying at minimum order http://ssrn.com/abstract=1628012
size ≤ 25.0 (>25.0%). Hanley, K. W. 1993. “The Underpricing of Initial Public
Downloaded by [Georgetown University] at 17:29 06 December 2015

Ret(Open,1→Close,1) = {[(Closing price day1 ‒ Open price day1)/Open price

day1) ‒ ((Closing HSI day1 ‒ Open HSI day1)/Open HSI day1)]}*100.
Ret(Close,1→Close,10) = {[(Closing price day10 ‒ Closing price day1)/Closing
price day1) ‒ ((Closing HSI day10 ‒ Closing HSI day1)/Closing HSI
day1)]}*100.
Ret(Close,1→Close,30) = {[(Closing price day30 ‒ Closing price day1)/Closing
price day1) ‒ ((Closing HSI day30 ‒ Closing HSI day1)/Closing HSI
day1)]}*100.
and (2) a pronounced contraction thereafter. IPO
underpricing, market sentiment and public float all
matter in this adjustment. Findings also corroborate
the importance of information asymmetry effects
(see Ritter 1984; Beatty and Ritter 1986; and Lowry,
Officer, and Schwert 2010). The present study iden-
tifies the robustness of such effects across a number
of dimensions; specifically issuer size, offer price
spread and underwriter quality.
I also examine the contention in Ljundqvist, et al.
(2006) that large offer discounts in ‘hot’ IPOs protect
issuers and subscribers against evaporating after-
market sentiment. My assessment of IPOs subject
to severe rationing resonates with such an account,
and extends accounts of initial returns in HK IPOs
(see Jiang and Li 2013).
Disclosure statement
I assert that there are no conflicts of interest in relation to
this article.
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