Study on the real initial return of IPO primary investors under the regulation of cash rationing

The previous researches about IPO initial returns paid little attention to the opportunity cost of the subscription money that is lose in IPO allocation, and the usual initial return formula cannot represent the real return of IPO primary investors under Chinese cash rationing regulation of new stock issues. This paper focuses on the real initial return of the cash subscription and analyzes its rationality and influence factors. Then, test the related issues using a sample of A-share IPOs in cash rationing during year 1998-2007. The results indicate that (1) the investors in the primary market may not get the high abnormal initial return from IPO subscription, (2) the noise demand in the primary market can reduce the return, (3) the noise trading in the secondary market can improve the return, (4) a higher offering price-earning ratio or a larger size of the company can improve the return by limiting the noise oversubscription.