The Study Of Relationship Between Underwriter Reputation And The Underpricing Of Initial Public Offerings

The problem of initial public offerings underpricing have been paid attention by many reserchers since it was been observed. And because of the important role of underwriter played in the stock market, its reputation will influence the IPO underpricing. According to foreign literitures, the underpricing of IPO is less severe if it was managed by more prestigious underwriters. With the increasing scale of Chinese stock market, more and more scholars have focused on this phenomenon. So this paper tries to find out the relationship between underwriter reputation and the underpricing of initial public offerings in our stock market. We must find out a siutable underwriter reputation measurement if we want to study the relationship between it and the IPO underpricing. This paper has established four kinds of underwriter reputation rank according to foreign literatures and the situation of Chinese stock market. ①the rank of the sum of the IPO managed by underwriters; ②the rank of the quantity of the IPO managed by underwriters; ③the reputation measurement which integrated the fist and the second means; ④the rank caculated by the market share of each year. These four kinds of methods were based on the Megginson-Weiss measure (MW), and they can reflect the underwriter reputation in the underwritering market to a large degree. Then this paper has introduced the overall situation of IPO underpricing in Chinese stock market. We find that the underpricing of IPO in our market is more severe than in other stock market, but the rate has decreased gradually. The sample in this study includes 1230 IPOs issued from1991 to June 30,2005.The author has classifyed underwriters into four categories according to the four kinds of reputation measurement, and AVONA has been used to test if significient difference existed between the rate of IPO underpricing that be managed by underwriters in different categories. And this paper still uses regression to analyse the relationship between underwriter reputation and the IPO underpricing. The underwriter reputation is the independent variable, and the market-adjusted rate of IPO underpricing is the dependent variable. But these empirical tests show that, the hypothesis of underwriter reputation is not come into existence in Chinese stock market. There may be many factors result in the unsignificient difference of the rate of IPO underpricing which managed by underwriters in different reputation categories and the positive relationship between them. In author's opinion, the limitation of the issuing and pricing system, and the underwriters' behavior often lack of restriction because of the weakness of reputation mechanism are the main causes. So this paper has also proposed several policy recommendations according to these situations.