The Impact of Regulation Regime Changes on ChiNext IPOs: Effects of 2013 and 2020 Reforms on Pricing and Overreaction

Since its inauguration, ChiNext has gone through three time periods with two different regulation regimes and three different sets of listing day trading restrictions. This paper studies the impact of regulation regimes and listing day trading restrictions on the initial return of ChiNext IPOs. We hypothesize that the initial return of a ChiNext IPO contains the issuers intrinsic value and the investors overreaction. The intrinsic value is represented by the IPOs 21st day return (monthly return), and the difference between the monthly and initial returns (intramonth return) is a proxy of the overreaction. We find that all significant variables for all three returns in all three time periods fall into four categories: pre-listing demand, post-listing demand, market condition and pre-listing issuer value. We observe stark contrasts among variable categories for each of the returns in the three time periods, which reveals an evolution of the investors behavior with regard to the progression of regulation regimes. Based on our findings, we argue that the differences among the levels and determinants of initial return, monthly return (intrinsic value) and intramonth return (overreaction) in different time periods can be largely explained by regulation regime changes along two dimensions: 1) approval vs. registration and 2) listing day trading curbs and return limits. We find that IPO pricing is demand-driven under the approval regime, but value-driven under the registration regime. We further compare the impact of regulation regime changes on ChiNext IPO pricing practice, and propose a future research plan on ChiNext IPO pricing efficiency with policy implication.