A Study On The Factors Affecting The IPO Underpricing Phenomenon In China's Stock Markets

Share offering is the base of stock market, and Initial public offering (IPO) is an important steps that stock company transform privately-hold to public-hold. In IPO, pricing is the vital link. Reasonable offering price is not only on the behalf of issuers, investors and investment bank, but also in favor of developing resource allocating function of stock market.In 1960s, overseas scholar noticed unreasonable phenomena that the offering price was always underpriced in IPO. Underpricing is defined as that initial public offerings of common stocks are systematically priced at a discount to their subsequent trading price In 1975, Ibbotson found empirical evidence of underpricing. Subsequently, more evidence from different country shows that there is underpricing either in developed market of in emerging market.The history of Chinese stock market is not long. The large underpricing magnitude in the Chinese IPO market has attracted much attention. Mok and Hui (1998) report an underpricing of 289% for a sample of 87 Shanghai IPOs listed from 1990 to 1993.1. Su and Fleisher (1999) find the underpricing level as high as 948.6% for A-share IPOs before January, 1996. A more updated report by Tian (2003) finds an average initial return of 267% for the IPOs from 1991 through 2000. These reported underpricing levels in the Chinese market are much higher than the average level of 60% in the emerging market (Jenkinson and Ljungqvist, 2001).From the viewpoint of finance research, IPO underpricing in the sense of abnormal short-run returns on IPOs is commonly perceived as a contradiction to capital-market efficiency. Moreover, higher degree of underpricing in China has affected development of its stock market. Therefore, it is significant that finding the reasons bringing about IPO underpricing and analyzing the factors carrying weight on the degree of underpricing. Because of this, the paper analyzed the factors that affect underpricing of China's stock markets according to the characters of the markets and based on the comparison of the IPO underpricing phenomena in China and abroad. The paper analyzed IPO underpricing in terms of institutions and the markets, and in order to put China's stock markets on a healthy development track, put forward concrete measures concerning how to optimize and perfect the IPO underpricing phenomenon in China's stock markets according to the situation of China.