Study On IPO Underpricing Of China's SME Board

High initial return has always been a hot problem in IPO (Initial Public Offering) research field. The scholars at home studied IPO underpricing of Chinese stock market on the basis of research results abroad, and obtained a lot of results .Along with the establishment of the small and medium enterprises(SME) board on May 17,2004, the listed stocks in SME board increased gradually and added up to 222 until March 6, 2008, especially in 2007 which 99 stocks were listed in SME board. And moreover SME board is the transition to Growth Enterprise Market (GEM), Therefore, the role of SME board in China's stock market is increasingly important. So the study of the high IPO underpricing rate in SME board is necessary.Owing to this, this paper studies the phenomenon of IPO underpricing in Chinese SME board on the basis of the research results at home and abroad. Based on the secondary market, in the paper, we believe that the overvaluing on secondary market is caused by the underwriter stabilization or speculative bubble existed in the market.Since SME board is different from the mainboard market, this paper describes current situations first of all, and then analyses its characteristics that differ from domestic main board market and international GEM. On base of cognizing these characteristics, this paper studies IPO underpricing. Firstly, Ruud model is modified. Employing return distribution test brought forward in Ruud model, the researcher studies underwriter stabilization on IPO. Unfortunately, imperical positive test demonstrates that stabilization is not so obvious on IPO that it cannot explain the issue of IPO underpricing of SME board. The distribution of skewness demonstrates that speculation exists in the market. In addition, using duration dependence, the researcher studies comprehensive index of SME board with the result that speculation indeed exists and gives birth to bubbles in SME market. Therefore the speculation-bubble hypothesis can well explain IPO underpricing in SME board. Finally, policy suggestions are put forward to relevant department according to above study results.