Offering methods and issuer-oriented underpricing costs: Evidence from the Hong Kong IPO market

We extend Leung and Menyah's (2006) study by relating the estimation of the issuer-oriented underpricing costs to the IPO offering methods. We distinguish between the oversubscription rates of institutional and retail investors in the estimation of the issuer-oriented underpricing costs associated with the pure fixed price, fixed price and bookbuilding IPOs. Leung and Menyah show that the issuer underpricing cost of new share issues (UN) averages about 14% of the headline underpricing. This average drops to about 7% after accounting for the interest income from application funds (RAF). In this study, we show that the mean of UN is about 16% (11%) of the headline underpricing before (after) accounting for the RAF. We report also evidence that the UN and the RAF depend on the IPO offering method. The UN of the pure fixed price, fixed price and bookbuilding IPOs represent 15.60%, 4.61% and 18.07% of the headline underpricing, respectively. These averages fall to 12.54%, -4.17% and 16.67% after accounting for the RAF. Our conclusions are robust across different time periods. © 2009 Elsevier B.V. All rights reserved.