An empirical extension of Rock's IPO underpricing model to three distinct groups of investors

This article examines earned returns and allocation details of more than 200 new offerings (Initial Public Offering, IPO) from companies that went public in Hong Kong during the period 1988 to 1995. Three distinct groups of investors are identified, each exhibiting a particular type of return's pattern. Each pattern seems to correspond to a specific level of information. This finding is of particular interest as it shows the level of return that an investor can expect from IPO investments, also being an extension of previous studies where, following Rock (1986), two, not three, groups of investors are identified. This article also finds that expected returns from IPOs remain positive and highly significant after adjusting for the allocation bias. With the exception of the smallest application sizes, results are invariant to adjustments such as transaction costs and the risk-free rate of return.