In 2006, it did not take much foresight to predict which direction shares of a Hong Kong initial public offering would head in their trading debut.
Last year, 44 of the 52 new issues in the city saw positive returns on their opening day of trading, according to data provided by Dealogic. Among IPOs rasing more than US$50 million, the average first-day return was 25.2 per cent.
With such gaudy returns, it is no surprise that small investors, large funds and wealthy tycoons all eagerly line up to get a stake. But the sure-fire gains punters count on are part of a mystery that has long intrigued economists around the world: why do initial public offerings so frequently go for a price below their market value?
After all, a sharp rise in an IPO's stock price just after it hits the market is a clear indication that enough demand existed to issue shares at a higher valuation. So for companies raising capital through an IPO, a heady first day on the trading floor also adds up to a large chunk of money left on the table.
Such underpricing is by no means a local phenomenon. But data from last year shows that just as Hong Kong neared the top of the table in the overall value of its IPOs, its first-day returns also shot past London and New York.
For the most part, financial experts say, the underpricing of Hong Kong IPOs ties to factors that are the same across the world's major exchanges. To start with, a lower offer price is meant to appease investors afraid of a phenomenon that economists call the 'winner's curse'. The curse arises in auctions where many people are bidding for an item whose real price is unknown.