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The University of Southampton
Centre for Risk Research

Hong Kong Professor Explains How to Manage Risks in IPOs

Published: 15 October 2013

In a Centre for Risk Research seminar, Professor Paul B. McGuinness of the Chinese University of Hong Kong explained how investors can better manage risk and uncertainty when participating in Initial Public Share Offerings (IPOs).

Professor McGuinness described his latest research examining the valuable market price signals which can be obtained from initial public offerings of shares. He examined ‘cornerstone' investor agreements, in which high net-worth individuals or organisations receive a guaranteed block of initial public offering (IPO) shares. He showed that these cornerstone agreements provide important potential signals of IPO value and argued that their recent emergence in the Hong Kong market setting, in tandem with detailed prospectus disclosures on such items, opens-up a new field of inquiry in the IPO information signaling arena. He suggested that this is especially important given the pricing risk and general uncertainty issues confronting investors.

Post-seminar analysis

Professor McGuinness clealry demonstrated a strong link between the dimensions of cornerstone agreements' (i.e., existence of the agreement, size, number of investing parties and lock-up period) and initial IPO value. He also showed that organisations which launch with cornerstone-agreements exhibit stronger returns over the first thirty days of listing and display stronger post-listing earnings growth. Finally, in relation to other potential value signals, he revealed strong support for an underwriter prestige effect and qualified support for effects arising from secondary offers, earnings forecast disclosures and IPO underpricing.

Chinese University of Hong Kong

Paul B. McGuinness is a Tenured Professor in the Department of Finance at CUHK, where he has served as Chairman of the Department for two extended terms. Prior to his appointment at CUHK, Professor McGuinness was a faculty member of the School of Industrial and Business Studies at the University of Warwick (UK). He has also held, while on leave from CUHK, positions as the National Bank Chair of Finance at the Victoria University of Wellington, New Zealand, Head of Research at the Hong Kong securities regulator, the Securities and Futures Commission, and Visiting Professor in the Department of Economics at Macquarie University in Sydney, Australia. He has published widely, including a book entitled ‘A Guide to the Equity Markets of Hong Kong', and has numerous published papers in internationally-refereed journals. He has also conducted consultancy work pertaining to securities market-related issues in Hong Kong and Mainland China.

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