A game-theoretic model of underpricing and over-subscription in Chinese IPO's

In Chinese A-share IPO's the bulk of available stock is allocated to investors via a lottery, with the payoff structure of participating in an IPO resembling a game. We solve a simple version of the game for the static Nash equilibrium in continuous strategies and derive the optimal IPO deposit for an arbitrary number of investors with common risk aversion within a two-moment decision model. A data set of 1121 Chinese A-share IPO's provides empirical support for our results.