An Empirical Investigation Of IPO Underpricing In Small And Medium Enterprise Board

The underpricing of IPOs exists in almos every stock market , although the degree of underpricing varies from country to country. This paper studies IPO underpricing of small and medium enterprise board in shenzhen stock exchange. The average amount of underpricing of 134 IPOs in small and medium enterprise board during the period from 2004 to 2007 is 91.07%. This paper attempts to explain why IPO underpricing in small and medium board is so severe.I review relative theories of IPO underpricing , such as asymmetric information theories ,institutional theories,control theories and behavioral theories. At the same time ,I test the leading asymmetric information hypotheses advanced for mature markets. The results show that the theories based on information asymmetry fail to fully explain IPO underpricing of small and medium enterprise board, though the winner's curse and moral hazard exit .A new explanation focusing on the interplay of supply and demand in secondary market is advanced and tested using the same sample data. The results show that IPO underpricing of small and medium enterprise board is the result of overpriced secondary market shares. The China Securities Regulatory Commission makes the final decision about an IPO size. And the secondary market is highly speculative. These factors lead to disequilibrium of supply and demand in secondary market and overprincing the shares. This conclusion suggests that primary and secondary markets reform is essential .