A Study Of IPO Underpricing In China's Stock Market

IPO(Initial Public Offerings) Underpricing means that the offer price of IPO is lower than the market price, which shows that the first-day closing price is obviously greater than the offer price. There is abnormal return in the first-day of going public. Large amounts of domestic and international research indicate that IPO underpricing generally exists in each country, but the degree and reason of IPO underpricing are different.In the course of IPO, pricing is the core sector. Whether the offer price reflects the real value depends on whether the IPO price is reasonable. The basic tow factors, which effect the offer pricing, are the approaches of valuing IPOs and ways of pricing.There are three approaches of valuing IPOs, Comparable Firms approach, Discount Cash Flow approach and Economic Value-Added approach. Each approach has it's own aspect. Underwriter chooses the appropriate approach in terms of different company.The ways of offer pricing mainly contain Book building, price bid, fixed price, etc. Book building is one of the most common methods currently being used in the world. It gives play to the function of the market to the maximum extent under protecting the basic prerequisite of investor's rights and interests.Through the multiple regression analysis of factors of IPO underpricing in China's stock market, this paper reveals that the way of IPO pricing, determined by the government, is the obvious factor which effects the IPO underpricing. For book building has positive function of reducing the degree of IPO underpricing, the government should regard book building as the core of offering pricing model in order to reduce the possibility of IPO underpricing, which assure that the function of resource allocating and financing of stock market can be used.The logic way of this paper is that, this paper firstly summarizes the former researches on the reasons of IPO underpricing , then describes several approaches of valuing IPOs , ways of offering pricing and their pros and cons. Furthermore, through the empirical research of china's stock market, this paper reveals the major factors that effect IPO underpricing of China's stock market. Finally, this paper puts up with some advices.