IPO Waves And Optimal Market Timing

Foreign scholars call clustering in time and industry in IPO market as IPO waves. IPO waves exist in many security markets in many countries, including China. While China’s IPO market has a special system as background, so the performance is in some extent different from foreign countries.This paper makes theoretical analysis on the factors that have influence on IPO waves, including capital demand factor, macroeconomic factor, industry development factor, and investor sentiment factor. Considering the specialty of the institution and system for China’s IPO issuing, the rhythm of IPO in China’s issuing market is strictly controlled by China Securities Regulatory Commission, and the approval of new share issuance is firmly associated with the stocks’prices in secondary market. Investors as the supply side on the capital market, their behavior have important impact on the issuing rhythm and the companies’listing decision. For the reasons above, this article then discusses the impacts of the changes in the way of issuing IPO and activities of investors on the performance of waves of IPO. This paper holds the view that the formation of the IPO waves is the clustering of the IPO market timing selection, and on this basis, establishes a optimal market timing model for the company with the to objective of maximizing the value of the company, based on the principle of American option, and a variable is set to measure the waiting time from IPO application to the Commission’s finally to approval in different periods.This paper selects the data in Shanghai and Shenzhen stock market from December 1990 to July 2010 between for empirical analysis. In the empirical analysis of IPO waves on the A-share market, the GDP growth, fixed investment, CPI growth rate as macroeconomic indicators, business climate indicators as industry indicators, and the money supply, stock index, the stock market turnover as financial market indicators are chosen, each of the extent and direction of the those variables’influence on the fluctuation of IPO volume is tested. In the empirical analysis of market timing, this paper choose a market/book ratio, market return, volatility of market returns, the total market profitability, the new company the uncertainty of the excess rate of return, the new company accounts as the indicators of market conditions, and makes comparisons on the change of those variables before and after the IPO waves in Shanghai and Shenzhen market, resulting the best market conditions when the optimal market timing opportunities arise.This paper established a optimal market timing for companies’IPOs based on the principle of American option, then use data on the Shanghai and Shenzhen stock markets between 1990-2010 to make empirical analysis on the impact factors on IPO volume volatility of China’s A share market and the optimum conditions for market timing of IPO.Study found that investment in fixed assets, CPI growth rates, money supply, market index and the turnover of IPO volume changes are significant causes and of IPO volume fluctuation. However, GDP growth rate has no obvious relationship with IPO volume. Fixed asset investment in GDP is more suitable as a proxy for capital needs than GDP. CPI growth index will rises shortly after IPO fluctuation. React of IPO volume on money supply’s is very significant, and a reformation is more direct and influential.The study also found that market reached the optimal conditions for listing when the absolute increase in market returns, increase in volatility of market returns, increase in the new company’s excess return volatility, and the market will observe an increase in the number of IPO. This shows phenomenon that firms in China often use listing opportunities to pursue short-term gains.Therefore, when the IPO issuing rhythm needs to be market, money supply is the most efficient and effective policy tool, but the reformation and institutional change will have a more direct effect. Stopping IPO issuing is a usually used tool to stop the declining of secondary market, and the effect is very significant. In China’s current system of issuing new shares, the policy plays an important role. There is often abuse of the opportunity windows during the IPO decision, triggering the occurrence of negative IPO waves. So suggestion is the authority should consistently monitor market indicators and make adjustments to the pace of the IPOs to smooth the negative fluctuations.