An Empirical Investigation Of IPO Underpricing Based On Asymmetry Information Theory

Initial public offerings (IPO) is the behavior that issuing corporations sale their shares to the unspecified investors in the stock market. The short-run performance of IPO is underpricing, which is common in every country's stock markets that the offering price is lower than the closing pricing of the first listing day. But IPO underpricing is very high in Chinese stock market. From the documentary at hand, the initial return ranges from 100 percent to 950 percent which is higher than other developing markets whose initial return is about 30%.Western scholars have been paid attention to the phenomena of underpricing from 1970s, done much research and brought forward many theories explaining IPO underpricing. Many scholars explained the phenomena of IPO underpricing by the way of asymmetry information between persons involved in IPO, which got support by many empirical investigations done in 1980s.Ritter and Welch(2002) differentiated asymmetry information between issuer holding more information than investment and vice versa. The former is mainly signaling theory, and the latter include reverse selection theory (winners'curse theory), information cascade theory, bookbuilding theory and agent-principal theory. Different model explains different countries'underpricng in different conditions, so the unique features determine that some IPO underpricng models don't applied in Chinese market. According to our country situations, signaling theory, reverse selection theory and information cascade theory may explain IPO underpricng better than others.This study investigates the signaling theory using a sample, which includes data of 144 firms that made an initial public offering during 1997—2000 and made subsequent seasoned equity offering within 4 years of their IPO. We examine the market reaction to the seasoned equity announcement and our results show that share price has no reaction to seasoned equity offering news. Then we examine whether the higher SEO proceeds can recover the cost of an underpriced IPO. Though some of our results are consistent with the signal theory, the main finding is not—we do not find a positive relationship between IPO underpricing and the proceeds of the equity offering pairs and the SEO.Then I examine the adverse selection and information cascades theories using a sample, which includes data of 145 firms that made an initial public offering of common stock during 2001-2002. Consistent with adverse selection, allocation rate is...