The Study Of IPO Review Under Registration System ——Evidence From STAR Market

In November 2018,General Secretary Xi Jinping announced the establishment of Science and Technology Innovation Board(STAR)of Shanghai Stock Exchange and a pilot reform of registration system.The launch of the STAR market has attracted widespread market attention.It is ground-breaking for China's capital market to support the high-quality development of economically innovative enterprises such as Alibaba and Tencent.The core of registration system reform is to straighten out the relationship between the government and the market,shift the right of companies to be listed from the government to the market.Under the registration system,the government should be devoted to strengthening the construction of information disclosure system so as to better play the central role of making up for market failures.The IPO review process on the STAR market is the first-line supervision for information disclosure,and it is the key to understand the legalization and Marketization reform of China's capital market.The study of IPO review under the registration system has important theoretical and practical contributions.The paper uses the sample of IPO firms from the STAR market between July 2019 and December 2020.Based on the theory of information asymmetry,institutional change,security regulation and cognitive bias,the paper studies the determinants of IPO review from the perspectives of internal governance and intermediary governance,and the economic consequences during the book-building and after listing.The main findings are as follows:First,in the process of STAR market review,which characteristics of the issuers are more concerned by regulators? Will intermediaries help reduce the intensity of review? First of all,companies with a low proportion of controlling shareholders or having difficulty in identifying actual controllers,which have stronger incentives for information disclosure manipulation to obtain private gains,will be subject to more intense review by regulators,indicating that regulators attach great attention to "key minority" entities that have a decisive influence on corporate governance and information disclosure.The results reflects the forward-looking and preventive nature of supervisory review;secondly,issuers with professional background of board secretaries(including professional backgrounds in securities firms,accounting firms,law firms and working as board secretaries in other listed companies)are faced with weaker review,indicating that the issuers hiring professional board secretaries pay more attention to the construction of the information disclosure system,and the professional board secretaries have indeed improved the issuer's information dissemination efficiency.Taken together,companies with a higher probability of information manipulation are more likely to be questioned,while companies that value information disclosure are less likely to be questioned,indicating the effectiveness of IPO review.Regarding the governance role of intermediary institutions,the reputation of brokerage firms and accounting firms did not help issuers reduce the intensity of review,while the reputation of law firms reduced the intensity of inquiry,indicating the importance of law under the reform of the registration system.The sponsor representative's industry experience and the accounting firm's IPO expertise can help soften the review intensity,revealing that the early stage of the STAR market's pilot program puts forward higher requirements on the industry knowledge and professional capabilities of intermediary agencies.Second,does the STAR review process reflect the core connotation of the "information disclosure-centered" registration system? Has the quality of the issuer's information disclosure been improved? First of all,the intensity of the review reduces the bids dispersion of institutional investors during IPO book-building,indicating that the review process provides institutional investors with finer information;secondly,the intensity of the review reduces the initial quotation level in the book-building and the adjustment of final offer prices when securities firm finally determine the issue price,indicating that the review intensity has reduced the optimistic bias in information disclosure and prompted more idiosyncratic risk information disclosure,thus improving the accuracy of pricing;finally,the review intensity has affected the risk perception of offline institutional investors for STAR market,and reduced the demand for new shares of institutional investors,indicating that the characteristics of the intensity of the review itself can also be used as a signal of the issuer's information quality and firm value uncertainty,which improves the risk aversion of institutional investors.On the whole,the review process plays a major information function during book-building of STAR market,which was specifically embodied in the information interpretation function and information production function,and was mainly reflected in the SSE review stage.Thirdly,how do investors in the secondary market view and interpret the comment letters?STAR market comment letters mainly play a signal function of the new shares quality after listing in the STAR market.Investors in the secondary market may not be able to effectively absorb information behind comment letters due to limited attention bias and cognitive bias.First of all,there is no significant correlation between SSE review and the IPO underpricing,the possible reasons are: on the one hand,when issuer face higher intensity review,it indicates that the supervisors have found more problems,revealing that issuer's initial information disclosure quality may be more poorer,and can convey the less quality and more uncertainty of the new shares to investors,so issuer's information asymmetry should be higher;on the other hand,higher intensity review can also reflect the degree of information disclosure improvement for the issuer.That is to say,issuers with different initial information disclosure quality eventually meet the same requirements of information disclosure compliance,and there is no significant difference in the quality of information disclosure after effective date of registration.To sum up,there is no significant correlation between the SSE's review and the IPO underpricing.After further controlling the information improvement effect of review during book-building,the SSE's review are significantly positively correlated with the IPO underpricing,this result is mainly due to the fact that the SSE's review can convey information about the uncertainty and quality of new stocks.Furthermore,the higher the intensity of the SSE's review,the new stocks' short-term market performance were worse,which further testify the signal function of the SSE's review.After distinguishing between the high and low shareholding ratios of institutional investors and reply quality of issuers,the SSE's review intensity has significantly increased the IPO underpricing of issuers with low institutional investment shareholding ratios and low reply quality,indicating that it is difficult for individual investors in the secondary market to absorb and digest new information provided by the inquiry,and they are more likely to regard the inquiry intensity as a signal of higher information and risk uncertainty,thereby increasing the level of IPO underpricing.Based on the above findings,this paper has three main contributions as follows:First of all,this paper provides direct evidence for the effectiveness of the STAR market 's review process under registration system reform.It is found that the STAR market review process can improve offline pricing efficiency during IPO book-building through information interpretation and information production functions,which can also be a signal of quality uncertainty of the new stocks for secondary market investors,when the Information processing cost is lower,the review process can reduce IPO underpricing.Different from the US IPO review process,that the comment letter will not make public only 20 days later after IPO takes effect,which greatly reduces the information function of the comment letter.The issuance and listing comment letters of the STAR market are publicly disclosed in a timely manner.This paper finds that the review process of the STAR market can help improve the efficiency of IPO pricing,thus provides important evidential support for the effectiveness of information disclosure supervision at the early stage of the STAR market registration system reform.Secondly,this paper is an important supplement to the research on the effectiveness of the comment letter system.The comment letter system has increasingly become the main regulatory measure to improve the level of information disclosure in the capital market.Existing research is mainly focused on the annual report comment letter and found that comment letter can help companies improve the quality of annual report disclosure.However,the research based on the annual report comment letter is faced with self-selection bias and mean regression problem.In the context of IPO review process,the problem of information asymmetry is more prominent,thus the supervisory role of IPO review is particularly important.Finally,this paper opens the black box of information disclosure supervision in the process of IPO issuance and listing.Benefited from transparency of the STAR market review process under the registration system,this paper directly portrays the interaction among issuers,intermediaries,and regulators in the IPO review process.During the IPO review process on the STAR market,regulators will pay more attention to the monitor of "key minority" entities that have a decisive influence on corporate governance and information disclosure,The industry expertise of sponsors and accounting firms and the reputation of law firms can help reduce the issuer's review intensity.The SSE has played a major role in information supervision during the review process,further supplementary enquiries from the China Securities Regulatory Commission can not reveal new information but can send signals to the secondary market.The examination and answers to above questions will deepen our understanding of the registration system reform and provide empirical evidence for the full implementation of the registration system in the A-share market.