Underpricing initial transactions: the sales strategy of residential developers

Abstract

Academic and policy debates on sales strategy of durable goods have lasted for decades, however, limited empirical study has been conducted in this field. With an empirical study of the first-hand residential market in Hong Kong, this research aims to make theoretical improvements and provide new evidence to the literature of durable goods. From the pilot study, an incremental pricing pattern is found from the sales of residential developments, which means initial transactions are underpriced compared to the latter transactions in a sale process. In order to explain this phenomenon, this research tests the IPO underpricing theory and seller’s learning behaviour with the first-hand residential developments sold during the period from 2013 to 2017. According to these theories, information asymmetry among buyers and limited comparables in the market would be the major reasons for developers adopting the underpricing strategy in the initial transactions.