Research On The Behaviors Of Inquiry Objects’ Bidding And Underwriters’ Pricing During The Market-oriented IPO Pricing Period

During June, 2009 to April, 2012, IPO pricing in Chinese stock market was wholly market-determined, and really realized market-oriented pricing. But anomalies emerged during this period such as “ three-high”--high offering price, high price-earning ratio, high over-funding, and falling below offering price, which caused the regulatory authority re-tighened up the self-directed pricing right of underwriters and strengthened the control of the quotations by book-building participants( inquiry objects). While many studies on these anomalies provide valuable insights, all-sided and in-depth investigations still are scarce. Based on these special features of the inquiry mechanism during this period, this dissertation constructs a theoretical model of generic divisible goods uniform-price auction, and argues the existence of pure strategy equilibrium of inquiry objects’ authentic bidding. Empirically, such econometric methods as parameters tests, nonparameters tests, OLS, Tobit,Probit model and quantile regression are employed to examine the behaviors of inquiry objects’ bidding based on public information, and investigate the IPO pricing behaviors of underwriters by focusing on the whole pricing process of IPO inquiry.From the angle of the microscopic behaviors of the main participants of IPO inquiry and pricing, this dissertation strives to answer the causes of the anomalies and seek a reform strategy for IPO issuance mechanism which accords with the present situation of Chinese stock market, and this research finds:(1) Under the special inquiry mechanism, the pure strategy equilibrium of inquiry objects’ authentic bidding does not exist, and inquiry objects tend to bid high price to acquire off-market allocation, no matter we suppose the inquiry objects’ bidding scheme is a non-increasing and continuously differentiable function or a discrete one-point function.(2) IPO Inquiry objects show the feature of retail investors when they bid off-market, and they are specially keen on small firms which are easily speculated,and their biddings have overt traits of chasing returns and free riders. This speculative bidding can obtain excess returns if inquiry objects can sell their off-market allocation on the first trading day of IPO, but the lock-up period could markedly decrease their returns and sometimes make them suffer a big loss. This speculative bidding is caused by the unreasonable inquiry mechanism and the distorted investment manner fostered in present stock market ambient.(3)Underwriters tend to overvalue the initial prices which are transmitted to IPOpricing when they set the scope of IPO initial prices. The offering price setted by underwriters correlates highly with inquiry objects’ bidding. The former is signally higher, on average, than the overall bidding in the result that underwriters obtain high commission. Underwriters, however, do not abuse their self-directed pricing right to promote willfully IPO offering prices, but make reverse correction according to the biddings and make offering prices close to the valuation in the secondary market. The promotion of offering price crush the speculation space on the first trading day of IPO,but it does not significantly reduce the returns for the off-market allocation when the lock-up period come due. Moreover, underwriters reward inquiry objects for their active bidding by raise the off-market allocation chance.(4)Underwriters value more the bidding information made by such inquiry objects as fund companies, security companies and recommend institutional investors who have close relationship with underwriters, and will tilt toward these objects when allot shares via off-market.Based on the above findings, it concludes that inquiry objects’ irrational bidding caused by institutional defects and the stock market atmosphere is the main reason for the anomalies of “three-high” and falling below offering price. Even though underwriters do not abuse the self-directed pricing right, the self-interest motivation boosts this result. As a result, this paper believes that the future reform of IPO issuance mechanism should comprehensively implement measures by reinforcing the intrinsic restraining force of market. Policy recommendations, such as to guide inquiry objects to bid rationally, to guide underwriters to price precisely, supervision strategies, are proposed in this dissertation.Three conceivable innovations exist in this dissertation: 1. By effectively taking into account the details of the distinctive inquiry mechanism design in Chinese stock market, I construct a theoretical model of generic divisible goods uniform-price auction to argue the existence of pure strategy equilibrium of inquiry objects’ authentic bidding. 2. I make a comprehensive study on the behaviors of inquiry objects’ bidding based on bookkeeping data of bidding in the light of public information. 3. I examine systematically the behaviors of underwriters’ IPO pricing during the market-oriented pricing period by focusing on the whole process of IPO pricing.This research extends the application range of the theory of divisible goods uniform-price auction, and enriches the literature on the behaviors of investors’ bidding and underwriters’ IPO pricing. In practice, it would help to expand understanding of such anomalies as “three-high” and falling below offering price, and contribute to propose reform plans of IPO issuance mechanism coinciding with the status quo of Chinese stock market.