Study Of Bookbuilding Mechanism In Chinese IPO Market

IPO Bookbuilding mechanism has been a global trend. It is also becoming increasingly popular in Chinese IPO market. To be in line with international practice, we have to accept and adapt to bookbuilding mechanism, therefore, study on bookbuilding mechanism is definitely important.Although offering mechanism in Chinese IPO market has experienced reform many times, the degree of IPO underpricing always maintains high level, even after introducing bookbuilding mechanism. Making objective evaluation on bookbuilding mechanism will be instructive for the development of our IPO market. The greatest difference between Chinese bookbuilding mechanism and standard bookbuilding mechanism is restricting IPO allocation. Recognizing the advantages and disadvantages of free IPO allocation will help to perfect bookbuilding mechanism in our country. The realistic background of Chinese IPO market is considered more in the study on IPO bookbuilding without independent IPO allocation, and it will be conducive to grasp the effects of institutional investors'subscription strategy on offering. Moreover, research on control of issue size will be beneficial to understand over-allotment option deeply, and it will provide reference about the necessity and the problems of popularizing over-allotment option.For above significance and motive, we use financial market microstructure theory, design theory, information economics, game theory, auction theory, optimal control theory, etc., and normative analysis, empirical analysis and numerical simulation. Taking into account the real procedure of Chinese IPO bookbuilding, we analyze and investigate IPO bookbuilding under different premise from two aspects, that is independent IPO allocation and control of issue size. The main conclusions as follows:1. Compare to the fixed-price-class offering methods,bookbuilding-class offering methods reduce IPO underpricing more significantly. Investors'sentiment counteracts or covers up the impact of bookbuilding mechanism, so that IPO underpricing is still high during bookbuilding phase. IPO holding return for lockup period still maintains very high level under bookbuilding-class offering methods.2. Under the bookbuilding procedure with independent IPO allocation, both lower pricing and quantity discrimination can be used to realize optimal mechanism design. Besides discount, underwriter can employ free allocation right to induce the informed investor to tell the true price. When oversubscription happens, underwriters can reduce the level of discount and increase the bottom price by strategic allocation so that both financing cost and IPO underpricing will be less. It suggests that financial supervisor should allow underwriter to allocate IPO stocks freely to a certain extent in China.3. If independent IPO allocation is allowed in IPO bookbuilding, the underwriter and affiliated institutional investor maybe exploit free allocation and information asymmetry to manipulate. The results show that if the difference of possible real values is large enough then the manipulation will not exist, otherwise the manipulation may arise. The probability of manipulation has positive relation to the probability of high value, the cost of holding IPO for affiliated investor, the number of momentum investors and the percentage of commission from affiliated investor, while has negative relation to the prior probability of manipulator entering the market, the sensitivity of liquidity investors demand to offering price, the sensitivity of market price to demand quantity, the percentage of underwriting fee from IPO firm and the offering size. Moreover, such kind of manipulation will lead to increase of IPO stock price in the short run while decrease of price in the long run. If the control of IPO allocation is canceled in the future in China, we should set up effective supervision system to prevent abuse of IPO allocation, and pay more attention to some factors related to manipulation.4. Under the conditions that bookbuilding mechanism is combined with fixed-price offering without independent IPO allocation, institutional investors'subscription strategies will affect IPOs results directly. Bookbuilding and fixed-price hybrid offering can be divided into sequential hybrid and simultaneous hybrid according to the sequence of bookbuilding and fixed-price offering. The subscription strategies under sequential method and simultaneous method are bidding strategy and capital distribution strategy respectively. On the assumption that institutional investors are homogeneous, the results of numerical simulation show that institutional investors'subscription strategies make the response of offering pricie and the difference between offering price and true value to other variables under sequential method and simultaneous method is almost identical. With the decrease of the expected true value, the expected first-day market price, the probability of first-day market price higher than true value, the fraction of bookbuilding issue size and information cost, or with the increase of the number of institutional investors, both IPO underpricing and the difference between offering price and true value will be lower. It suggests that market management layer should adopt appropriate measures according to above relation.5. When over-allotment option is included in IPO bookbuilding, the control of issue size within certain range will allow the underwriter to make choice between hot-IPO strategy and weak-IPO strategy. If the estimation of initial aftermarket price is low, the underwriter will choose weak-IPO strategy, which means the underwriter will select relatively high price and offset the over-sold short through buying stocks from the secondary market, and the overall issue size will be invariant. If the estimation of initial aftermarket price is high, the underwriter will choose hot-IPO strategy, which means the underwriter will select relatively low price and offset the over-sold short through executing the over-allotment option completely, and the overall issue size will be increased. It suggests that over-allotment option should be popularized to exert its negative feedback on IPO bookbuilding so that the variance of offering price and initial aftermarket price will be lower.The primary innovations of the thesis are as follows:1. In the part of empirical analysis of Chinese IPO first-day return, the difference between existing study and this study is that we use principal components analysis to extract from five factors to construct investors'sentiment index, add it to controled varibles, on which we examine the influence of offering mechanism on IPO first-day return. Moreover, we gather statistics and compare the IPO holding return for lockup period between fixed-price-class offering method and bookbuilding-class offering method, as well as price range between Chinese A-share market and Hongkong stock market, which prvide comprehensive evidence to appraise Chinese IPO bookbuilding mechanism. 2. Compare to the existing literatures which consider discount or allocation, incentive allocation and discount are considered at the same time in optimal mechanism design in this dissertation, and the offering bottom price is introduced to the price range. We investigate the relationship between price range and allocation quantity, and obtain the optimal price range and allocation strategy so that the advantages of independent allocation are reflected. On the other hand, the disadvantages of independent allocation are reflected in the manipulation in case of no restriction on IPO allocation. To distinguish from the existing literatures, bookbuilding mechanism is introduced to the model. We study the allocation strategy adopted by the underwriter in the pooling equilibrium of manipulation. In addition, we analyze the incentive compatibility conditions to which the existence of pooling equilibrium should satisfy and examine some factors'impact on the existence of manipulation.3. In bookbuilding without independent IPO allocation, Chinese realistic IPO background is considered and the condition of bookbuilding and fixed-price hybrid offering is added. Divide bookbuilding and fixed-price hybrid offering into sequential hybrid and simultaneous hybrid, and point out that the key points of subscription strategy in the two kinds of hybrid are different. Through modeling and simulation we obtain the impact of institutional investors'subscription strategy on bookbuilding without independent IPO allocation, which fill the gap in related research. Moreover, in the part of IPO bookbuilding with over-allotment option, the pricing strategy is divided into hot-IPO strategy and weak-IPO strategy. Take into account the procedure of Chinese IPO with over-allotment option, it presents how the underwriter determines the pricing strategy and what effect it brings to offering price and issue size through modeling and simulation. Therefore, it is instructive as a complement to existing literatures.