Study On Government Window Guidance, Inquiry Pricing Mechanism And Underpricing Of IPOs In China

The phenomenon of significantly positive first-day initial return of Initial Public Offerings (IPOs), also known as IPO underpricing, generally occurs all over the world. There is still no consensus about the source and the reasons for IPO underpricing and no single theory can fully explain this phenomenon. A lot of research focused on China IPO underpricing, but the research from the perspective of the window guidance is rarer, and the research on inquiry IPO underpricing is fewer. This empirical study is helpful for understanding the high underpricing in China and making a reference for improving the pricing efficiency.In order to gain a better understanding of the high initial return of IPOs phenomenon in China, this paper focus on the first-day initial return in our empirical study. Moreover, on the base of the analysis, the feasible experience for improving the pricing efficiency of IPOs will be discussed. This study has three main research questions:First, based on the unique institutional arrangements and features and combined with the government's "window guidance" perspective in China's IPO market, the study explores the patterns of the impact on institutional factors on the pricing efficiency of IPOs. Second, the study tries to explain the pattern of IPO underpricing under the inquiry pricing mechanism and the factors that have influence on the underpricing. Third, based on the process of market-oriented pricing mechanism reform, this study also explores the new perspective on evaluating the pricing efficiency for the further discussion to provide us a better understanding on China's IPO underpricing.Using a large sample of A-share IPOs during 2001-2008, this paper performed phased test and multiple regression to analysis the effects of government "windows guidance". The results suggest that, (1) the effects of government "windows guidance" is weakening under a higher market-driven pricing mechanism, indicating an improvement in pricing efficiency and achievement of the government's regulation goals; (2) the post-IPO uncertainty risk, the initial inquiry price range and the price adjustment can be good explanation for inquiry IPOs' underpricing; (3) compared with non-inquiry IPOs, market-oriented pricing mechanism improves the information content of IPO prices. The first-day initial return is significantly positively correlated to the stock price information content. Using the information efficiency as a measure of pricing efficiency, the research results support the inquiry theory of information-gathering hypothesis in IPO underpricing and make up for the lack of empirical evidence of information-gathering hypothesis.The results have important theoretical and practical significance. First of all, from the perspective of China's regulation settings, it is more applicable to use government "window guidance" to understand the IPO underpricing than simply based on the western IPO underpricing theories. Secondly, this study clarified the relationship among the China's securities regulation, the path of market-oriented pricing reform process and the improvement of pricing efficiency of IPOs. Finally, the information content of IPO price is improved by the market-based inquiry pricing method. Moreover, the market mechanism began to play a major role in pricing IPOs. Furthermore, continuous improvement in the market-oriented pricing mechanism will be helpful to improve the IPO pricing efficiency.