Evidence on the effect of ‘Claw-Back’ provisions on IPO share allocation and underpricing in Hong Kong

The article examines share allocation practices of over 300 initial public offerings (IPOs) in Hong Kong during the years immediately following the enacting of a ‘Claw-Back’ provision for IPO share reallocation. The examination of exhaustive micro-level data reveals that small (uninformed, retail) investors earn higher initial returns than large investors. Before the enacting of the ‘Claw-Back’ provision, small investors were unfavourably treated in relation to large investors. The pattern now prevailing in the proportion of shares allocated to small and large investors also differs from that observed previously. When attempting to isolate the determinants of IPO underpricing in Hong Kong, the article also shows that both the ‘informed demand’ hypothesis and the signalling effect of underwriters’ reputation are significant determinants of underpricing. Such result, not visible when pooled OLS regressions are used, becomes apparent through the use of a system of simultaneous equations.