The Study On The Effect Of Heterogeneous Expectation To IPO Underpricing

In recent decades,the Initial Public Offerings has been the concern of financial researchers in China or abroad, in particular, the mystery of "IPO underpricing" enjoyed more in-depth study by many scholars. Short-term performance of IPO issue price generally is lower than the closing price listed on the first day, which has been referred to as IPO underpricing. Over the past three decades, foreign scholars carry out a study of the phenomenon, and put forward a variety of theories and hypothesis, but so far there is no theory recognized generally. Although China's stock market after more than 20 years of development, but in the IPO market high underpricing phenomenon still exists, and compared with mature capital markets, IPO underpricing is higher and high underpricing will sustain for a very long time. China's IPO underpricing anomaly has attracted a lot of the attention of scholars. Taking into account the unique combination of China's market environment and institutional background, scholars have put forward a wide range of theoretical description and speculation, but empirical research literature has usually only obtained the relevant factors affecting IPO underpricing, not to explain theoretically the fundamental reason for high IPO underpricing in China.Since 2005, China fully adopted the book building method to issue new shares, but the IPO underpricing on average is still more than 120 percent. Market-oriented reform of distribution system has not fundamentally eliminated the high IPO underpricing phenomenon. Why market-based pricing can not eliminate the high IPO underpricing phenomenon in China? Theoretically identifying the root cause of the high IPO underpricing will provide reference for enhancing the efficiency of resource allocation in the primary market.In view of the actual situation in the primary market and under the assumption that participants have heterogeneous expectations of new shares, this article will study systematically the high IPO underpricing phenomenon in China and try to theoretically, empirically and numerically explain and demonstrate it. This article will explain the high IPO underpricing in China from four aspects.By studying the impact of heterogeneous expectations on IPO underpricing in different ways of distribution, this paper raise heterogeneous expectations hypothesis--Institutional investors and retail investors in the assessment of the value of new shares have inevitable differences. According to this hypothesis, the author establishes respectively the pricing and underpricing models under fixed-price and bookbuilding, and does a comparative study between them. Studies show that in two ways of the issue, issuers and institutional investors are incentive to underprice the new shares, therefore, neither of the two ways can eliminate the IPO underpricing; studies also point out that the more different between investors assess the value of new shares, the higher the unintentional IPO underpricing and then the higher the IPO underpricing of the first day. Numerical analysis support the conclusions of this part; at the same time, this section empirically confirms that the proxy indicators of investors'heterogeneity is significantly positively correlated with IPO underpricing, which indicates that the high IPO underpricing in China may mainly come from the inadvertent underpricing induced by the heterogeneity of investors.With behavioral finance theory and the CARA utility function to study the impact of heterogeneous expectation on IPO underpricing under bookbuilding, this paper establishes IPO pricing and underpricing models based on the objective of maximizing the expected utility of the issuers and institutional investors, and does a comparative study of underpricing based on whether there are differences on the evaluation of new shares between issuers and institutional investors, institutions and potential investors, institutional investors. Studies show that regardless of what kind of heterogeneous expectations, the participants that price new shares are incentive to underpricing, so it is not possible to eliminate IPO underpricing under bookbuilding; when there is no difference between institutional investors in the IPO valuation of new shares, the institutional investors seek a higher intentional IPO underpricing by hiding demand; the issuer can increase the number of institutional investors or change rules of rights issue to avoid man-made intentional acts of underpricing and lower IPO underpricing. In stock market the greater the difference(heterogeneous expectation) between participants ,the higher the inadvertent underpricing and IPO underpricing; at the same time, the difference(heterogeneous expectation) between participants may be large enough to make the price of new shares below the issue price in the first day; when there is difference (heterogeneous expectation) between institutional investors in the IPO valuation of new shares, the institutional investors can not achieve the purpose of intentional underpricing by hiding demand, but to avoid "adverse selection"often leads to a higher inadvertent underpricing.Finally, each chapter of the thesis does a numerical analysis to support the conclusion of this article; on the other hand, the article empirically analyses the factors affected IPO underpricing in China. The analysis shows that heterogeneity of expectation does exist in our country and have great impact on the IPO underpricing, which provides empirical support for the conclusion.