A Research On IPO Price Formation And Short-term Price Adjustment

IPO pricing is one of the most difficult puzzle recognized by the international financial field. Theoretically speaking,the IPO prices of well-performed firms should be higher than those of bad-performed firms,and the trade prices after going public should reflect intrinsic value of the companies as well. But as a matter of fact,the IPO prices are not always consistent with companies' intrinsic value,the first-day trade prices after IPO sometimes deviate its intrinsic value,leading to the underpricing of IPO. What's more, IPO underpricing is more serious in China,bringing about excess returns in the IPO market. But the excess returns will go back to equilibrium during a short-term adjustment.Then,what factors influence the establishment of IPO offering prices? Why there is such a phenomenon as IPO underpricing,and how does it change in a short-term period?These are the core issues of the paper.We believe:the final equlibrium price formation of IPO shares in the stock market is determined by stock supply and potential demand. When the stock issuing price equals to the buyers' expected price,and the number of shares issued equals to the potential demand,the price tends to be equilibrium, which reflects the stock market average profits and the company's intrinsic value. As a matter of fact,the process contains two mainly stages: the ex-ante offering price formation stage,and the ex-post short-term adjustment in the second market. Therefore this paper investigates on IPO price formation and short-term price adjustment in China. The analysis of price formation is focusing on the ex-ante formation stage of IPO price,while the short-term price adjustment is focusing on the first-day trade price and the short-term adjustment after going public. The main conclusions of this dissertation are as follows:Firstly, in the stage for the issue price formation. The research indicates there are four factors influencing the issue price: (l)the influence of market rate level. The higher the market rate, the higher the issue price; (2) the influence of IPO quantity. The more the issue quantity, the higher the issue price; (3) the P/E level. The higher the P/E level, the higher the issue price ; (4)the corporate financial capability, mainly the prospected profitability and operation ability, and so on. It is found that better profitability and operation ability are related to higher issue price.Secondly, in the first day for IPO aftermarket trading, the paper focuses on IPO underpricing. The research shows that: In the IPO market in China, the investors are generally have a tendency of speculation, the investors are not sensitive to the high debt rates of companies, nor the high investment risk., The issuer more informed than the investors ,so the turnover rate and the underpricing on the IPO day is very high; and furthermore, from the prospect of the listed companies, there is a popular phenomenon of high P/E. This means not only the issuers and the underwriter, but also the investors have an overoptimistic expection from the window of opportunity. When it refers to the underwriters, we find the characteristics of the underwriters have no effect on the IPO pricing. And it is concluded that there is no big changes of the short-term prices after IPO' listing, the IPO underpricing will sustain at least one month after that. What's more, although there is a high rate of non-tradable shares in most of State-Owned Enterprises, it has a little effect on the IPO' trade prices. In other words, the existence of non-tradable shares will only influence the company governance and other aspects after IPO.And then, in the stage for the IPOs aftermarket price adjustment, the paper mainly computes the speed price adjustment. The mainly foundings in this chapter are as follows. In the aftermarket trading days, the initial retuns volatility do change over the times, with the volatility in the 2-3%. In mean, the aftermarket speed of price adjustment is about 2 trading week. Moreover, the days for price adjustment tend to become smaller with year.Finally, considering the real situation in China,we turn to the particular problem in IPO pricing, which is the existence of non-circulating shares. We design a compensative pricing model, and at the same time, by using the theoretical model, we offer a case analysis. The paper explains the possible inflence of non-tradable shares on IPO pricing, and it proves that the model proposed here can do a better job in the reasonable pricing of non-tradable shares .In summary, the IPO Price formation in China are composed three stages, ie the stage for issue price formation, the first days of IPO, and the stage for aftermarket price adjustment. In the stage for issue price formation, the underwriters and the issuers dominate the control right for the issue price, and issue pricing is mainly based on some corporate financial indicates. In the first days, the high initial underpricing are mainly raise on the speclitive behaviors and over-optimistic trading in the first day trading. Then, in the stage for the aftermarket price adjustment price, the final equilibrium price is discovered about 2 trading weeks later. At last the paper probes into the non-tradable shares problem and design a non-tradable shares pricing model.