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This article analyses the initial public offering (IPO) underpricing issue of 237 new A-shares from 2002 to 2004, shortly before the IPO suspension in the Chinese domestic market. The data set comes out with an initial return mean of 88.67%, an average market-adjusted initial return of 89.61% and an average market-adjusted log-return of 59.18%, which are significantly lower than the results of former empirical studies. This downward trend of IPO returns reinforces the explanation that a transition economy reduces its cheap state assets sell-off in line with the maturing of its capital market. Based on the results of correlation and regression analysis, we ascertain that the IPO underpricing is overwhelmingly caused by the excess demand and the generally positive sentiment in China's secondary/after-IPO market for new shares, resulting in high trading turnover on the first listing day. This is strengthened by the finding that more initial returns could be generated on the SHSE than on the SZSE, as a result of strong public interest in blue chip IPOs on the SHSE.
