Price Discovery In Ipo Mechanism

As the primary market, the initial public offerings of common stocks, the source of the securities market, play a significant role in the securities market's development. The financing function of the Chinese stock market has been overemphasized while other functions have been largely ignored. Investors' confidence will gradually weaken in a speculative market where firms aim at the maximization of raising capital and investors cannot make value investments through effective price discovery mechanisms. The financing function will be impaired in return. To reverse this situation, one key solution is to establish efficient price discovery mechanisms and guide market participants' aims and behaviors by effective institutional arrangements.The paper investigates the price discovery process and different IPO mechanisms. It contains eight chapters. Chapter one presents an introduction. The next three chapters make theoretical analysis of price discovery in the common goods markets and the IPO market. The last four chapters explore international IPO mechanisms, examine Chinese IPO systems, and raise policy proposals.The paper begins with analyzing price discovery in common goods markets. Transparency, fairness and liquidity affect the efficiency of price discovery. When information becomes a public good, it becomes necessary for governments to intervene in the market for encouraging the provision of information. For a deeper understanding of price discovery, we compare two closely related issues, price determination and price formation. Price determination can be elucidated through classical value theories. We may find three rationales in the price formation process, the market demand and supply rationale, the participants adjustment rationale, and the information searching rationale.After the above study, we turn to price discovery in the IPO market. The price discovery function is crucial to the stock market. Similar to situations in common goods markets, the stock price relies on a firm's intrinsic value. However, the stock price formation process is more complicated. The offer price is affected by numerous factors. The aftermarket performance may serve as a benchmark to judge the IPO price discovery efficiency.The IPO price anomaly has been a focus of the earlier literature, which can be divided into two categories, the informational approach theories and the rational approach ones. The former includes theories concerning information asymmetryamong issuers, investment banks and investors, namely the agency theory and the investment banks' reputation theory; a theory concerning information asymmetry between investment banks and investors, the dynamic information acquisition model; theories concerning information asymmetry between issuers and investors, that is, the signaling model and the risk compensation theory; and theories concerning information asymmetry inside investors, the winner's curse theory and the information production model. The latter includes a theory concerning irrational pre-issue shareholders, the prospect theory; a theory concerning rational investment banks, the lawsuit avoidance theory; and theories concerning irrational investors, namely the information cascade model and the fads driven theory. Based upon these theories, we analyze the IPO price discovery process and present a market participants behaviors mean-variance approach model which shows that the accumulation of "lemons" in the secondary market may drive away investors and cause the shrinking of the entire market in the long run. Measures to avoid the shrinking come from two aspects, the self-improvement of the participants, and the enhancement of outside regulations.Following the above theoretical exploration, the paper investigates practical IPO mechanisms. There are three major groups of mechanisms, the supervision, the underwriting, and the sales mechanisms. These mechanisms affect directly the price discovery efficiency. The paper makes an institutional analysis of the Chinese IPO mechanisms evolution and an empirical study on the policy effects. The results show that there remains much room to improve the primary market system.The paper finally points out that possessing the features of an emerging and transitional market, China needs to ameliorate coordinated measures and pave its way gradually for marketization. As for supervision, we shall first improve the current approval-based system and then promote the transition to a registration system. With regard to underwriting, besides implementing the current mechanism, we shall encourage the introduction of the firm commitment method. In respect to sales, bookbuilding needs to be further mended and meanwhile diversified sales methods should be allowed. Furthermore, the stock market structure needs to be optimized and a more complete market system shall be set up.