Underpricing Of New Equity Issues And Information Asymmetric

Many economists have given birth to extensive empirical and theoretical literature while trying to explain the reasons that companies choose to quote themselves at such a price as to generate underpricing. This paper, dedicated to the Chinese situation, intends to examine the consistency of the asymmetric information theories formulated to explain underpricing. Beginning from the Baron Theory, based on the existence of the asymmetric information among the market participators, this paper hypothesize that: (1) Hold the other factors constant, the degree of underpricing is positively related to the extent of information asymmetric among the market participators; (2) The extent of information asymmetric is a decreasing function with the time length after the company go public. By examining the difference of the degree of underpricing between IPOs and SEOs(public cash offer) in Chinese market, we confirmed the above hypothesizes.Using linear regression model, we also tested the relations between D(declining degree of underpricing between IPOs and SEOs) and T(time interval between IPOs and SEOs). Contrary to our hypothesis, the data demonstrates that the correlation is weak. The possible reasons may be the different issue policy and the limitation of the premises.It may be necessary to dedicate greater attention to the expected information asymmetric the investors would encounter after offerings (it may affect the investors price decision). However, these mattersbelong to related research fields and are not contemplated in the present paper.This paper is organized as follows:Chapter 1: Presented the different viewpoints towards the IPOs' underpricing.Chapter 2: Reviewed the literature of the asymmetric information theory and the applying of such theory to IPOs' underpricing subject.Chapter 3: Reviewed the literature explaining the SEOs' underpricing and advanced the author's opinions.Chapter 4: Raised three hypotheses and described the research methodology.Chapter 5: Summarized the empirical findings and presented some limitations in the research methodology.