The IPO Price Formation And Underpricing Study Under The Bookbuilding Mechansism In China

IPO pricing and underpricing have been the hot issue of finance and already widelydrawn the scholars attention home and abroad in recent decades. Foreign scholars carryout a study of the phenomenon, and put forward a variety of theories and hypothesis,but so far there is no theory recognized generally. After the establishment of Chinesesecurities market, IPO pricing mechanism has been constantly improved and perfected.Before the "Security Law" put into practice in1999, the issue of new shares isexamination and approval system, then the system is transmitted into approval system.Many scholars have studied the new stock’s pricing, but almost concentrate onexplaining the underpricing of new stock. After the implement of bookbuildingmechanism in2005, issuing Mechanism of new issue mainly experienced two majorbookbuilding mechanism reform. So far, underpricing phenomenon have relieved, buthigh price-earnings ratio and obvious over raised appear. single theory can fully explainthis phenomenon. A lot of research focused on China IPO underpricing, but the researchin combination with bookbuilding mechanism is rarer. In this case, the research of IPOprice formation and underpricing in bookbuilding mechanism become very valuable.In view of the actual situation and under the characteristic bookbuildingmechanism and the reform of mechanism, this article will study IPO price formationand underpricing in China, and try to theoretically and empirically explain anddemonstrate it. This article will study IPO price formation and underpricing from fouraspects.Firstly, this article analyse the IPO price formation in two-stage bookbuilding.After the implement of bookbuilding mechanism, two-stage bookbuilding has existed.Although IPO pricing of firms in Shenzhen’s SME and GEM Board can be directlydetermined by preliminary bookbuilding, IPO pricing of main board market isdetermined by two-stage bookbuilding. Combining with the reality of China’s IPObookbuilding，under the premise of bookbuilding can be divided into preliminarybookbuilding and accumulated bidding bookbuilding, this paper study the equilibriumbidding strategy of the institutional investors in two stages and the final IPO priceformation. We analyse the motive of the institutional investors shading their demands inbidding and lowering the issue price. Our analysis indicates that: institutional investorswill shade their demands in preliminary bookbuilding deliberately; the ultimate equilibrium price will be upper limit of issue price range; the greater the shadingdemands of institutional investors in preliminary bookbuilding, the smaller ipo issueprice; the greater the wide of the issue price range, the higer IPO issue price. Empiricalanalysis also confirmed the validity of conclusions.Secondly, base on evolutionary game theory, this article analyse the IPO priceformation in one-stage bookbuilding. Under the premise of bookbuilding is one-stageand IPO pricing window guidance is cancelled, the author establishes a one-groupevolutionary game model of the inquiry institution investors, and analyse institutionalinvestors’ bidding behavior and the IPO price formation in one-stage bookbuilding.Institutional investors’ bidding behavior and the IPO price formation are both relatedwith inquiry institution investors’ mean value of IPO underpricing. When the meanvalue of IPO underpricing is large enough, the investors will tend to choose highbidding, in order to obtain new shares and make a certain profit through sell them insecondary market. The more high bidding investors, the higher underwriter’s pricing.The pricing may be higher than the intrinsic value of the listed company. When themean value of IPO underpricing is small enough, the investors will tend to choose lowbidding or not to participate in the inquiry. The more low bidding investors, the lowerunderwriter’s pricing. The pricing may be lower than the intrinsic value of the listedcompany. When the investors of choosing not to participate in the inquiry are sufficientenough, new issues will be terminated because of too little inquiry institution investors.Then, as the background of the twice reform of IPO bookbuilding mechanism, thepaper selects IPO data from2006to2011in China SME Board, and tests the existenceof deliberate underpricing in the Initial Public Offerings before and after the reformusing a Stochastic Frontier Model. The results indicate that there is deliberateunderpricing behavior in new share before the first reform of IPO bookbuildingmechanism, and the deliberate underpricing rate can not be ignored, deliberateunderpricing exacerbate the high underpricing. After the first reform of IPObookbuilding mechanism, there is no deliberate underpricing behavior in new share,IPO underpricing mainly comes from the high secondary market valuation. There is nosignificant change in the pricing behavior before and after the second reform of IPObookbuilding mechanism.Finally, as the background of the twice reform of IPO bookbuilding mechanism,the paper selects IPO data from2006to2011in China SME Board, and studies therelation between speculative behavior in new share and IPO underpricing using a multiple regression model. The empirical results indicate that IPO underpricing hasdecreased evidently in China SME Board after the twice reform of IPO bookbuildingmechanism. Speculative behavior is one of the main forming reasons of IPOunderpricing in SME board, and speculative behavior and IPO underpricing issignificantly positive correlation. After the twice reform of IPO bookbuildingmechanism, the explanatory power of speculative behavior for IPO underpricing hasincreased evidently. After the second reform of IPO bookbuilding mechanism,speculative behavior has become the most important determining force of IPOunderpricing.