The Research Of Pre-IPO Audit And IPOs Reasonable Pricing

Initial Public Offerings(IPOs)is an important path for company to raise funds,keep growing and build reputation.Meanwhile it is also an important mechanism for resource allocation,industry forecasts and healthy development of whole capital market.Reasonable pricing system is extremely important to the IPO market.However,lots of empirical studies and market realities indicate that IPO underpricing phenomenon has persisted over time and internationally,and will be more severed in emerging market.Excessively high underpricing will cause the unnecessary loss of issuer,and market failure of resource allocation role.For this reason,IPOs reasonable pricing has long-tem been the most important target in practice field,and the well-researched sector in academy field.The research of underpricing reasons can be divided into two major trends:analysis based on both information asymmetric theory and information symmetric theory,the first section has occupied the mainstream position ever since.IPOs can give rise to substantial information asymmetries,this will lead to great ex-ante uncertainty and underpricing.Meanwhile,Pre-IPO audit is the only IPO market micro-information intermediation which can directly affect the new issue pricing and underpricing.Our research choose this topic under discussion,has its own suitability and rationality.Western empirical studies mainly focus on external audit,indicate it might play two major roles in affecting IPO underpricing:firstly,it may serve as a signal of company value and positively related to the trading market company value,suggesting greater undepricing.Secondly,it might play informational role that helps reduce information asymmetric level,leading to lower underpricing.Only a few studies focus on the signaling role of issuer audit committee.Therefore,domestic studies focus on empirical test for western theory,especially the reputation hypothesis.After comparison,we find lots of shortage in domestic research,such as leave out theory analysis,ignore domestic market situation and unscientific empirical approach.In general,our research can fill the gap for domestic study,and provide emerging market and Chinese evidence for the global study.Our new issue market is based on the emerging market which transferred from Planned Economy to Market Economy.It has lots of institutional background and market situation with Chinese characteristics,such as lack of marketziation in operating mechanism and environment,the rent-seeking problem of IEC(Insurance Examination Committee),highly flexible place in policy implementation,moderate general legal environment and the very unique IPO shutting.All these specific features will lead to extremely high underpricing directly or indirectly,severely deter the interests of investors in IPO market,especially medium and small investors.Such unique background and market issues substantially demand for underpricing problem-solved related research,and also provide a nature setting for research innovation.Since April 28,2012,CSRC(China Securities Regulatory Committee)started the pace of the New-Issue Market system reform again.This round of reform aims at promoting marketization,making the issue price more rely on market supply and demand,paying more attention to the information disclosure.All these moves are designed to improve the rationality of pricing,establish long-term value concept in IPO market,protect the interests of medium and small investors and eventually lay the foundation for the future transition from "Examination and Approval System" to"Registration System".With regards to this,based on Western theory and China's market,we system investigate the Pre-IPO Audit pricing role during IPO process.Our study give a more comprehensive definition of Pre-IPO Audit concept,including internal audit section;and also present a new concept about reasonable pricing,based on the extremely high degree of underpcing and reform goal of contain it.Our theoretical study shows that IPO market has the economic demands for Pre-IPO Audit.It might play three major roles in affecting IPO underpricing:Firstly,it may serve as a signal of company value and positively related to the trading market company value,suggesting greater undepricing.Secondly,it might play informational role that helps reduce information asymmetric level,leading to lower underpricing.Thirdly,it will serve as corporate governance mechanism and enhance the intrinsic value of issuer,also leading to lower underpricing.Based on the prospect theory and game theory,we generate an "one-time tripartite game model" to describe the price-setting process in IPOs.The underwriter and issuer will be the leading participants,the audit results will be their price-barging basis.The final role of audit will depend on both market environments and barging results.And this role will also be the auditor's optimal choice in their following games.Based on the upper theoretical conclusion,we further found out the empirical evidence of actual audit role in this stage.Firstly,the Pre-IPO External Audit plays an signaling role,leads to higher undepricing;while the Pre-IPO Internal Audit plays information and corporate governance role,both lead to lower underpricing.However,the Pre-IPO Audit still plays an signaling role in general.This status quo of audt's function clearly does not meet the requirement of reasonable pricing target.The market efficiency of audit do will affect by external market environment and internal corporate environment,and the cooperation is efficient too,indicates the audit results are reliable.However,there are still lots of deficiencies,such as the rent-seeking problems of IEC,the lack of professional in audit committee and almost all the function in internal audit sector.The above results indicate that China's Pre-IPO Audit is still in its initial development stage,and does not play a strong role in helping IPOs reasonable pricing.The finding of this research can help enhancing the theoretical understanding of process and nature in IPOs pricing,besides function mechanism and current situation of Pre-IPO Audit.Further more,the research provide regulators with empirical evidence and future direction to the reform of New-Issue Market in China on particular clauses such as emphasize information disclosure,specify pricing process,transfer CSRC function,pay more attention to the information intermediation and so on.It can also help enhancing the pricing efficiency,guaranteeing IPO market resource allocation function,and protecting the interests of medium and small investors.