Comparative Study On IPO Efficiency Of China's Stock Market Before-and-after Equity Separation Reform

Since the birth of China stock market in 1990, a series of reforms have taken on, aiming at improving the efficiency of capital market. Undoubtedly, equity separation reform on April 29, 2005 is the epoch-making one of all. IPO efficiency, the primary market efficiency, is an important part of capital market efficiency, which equity separation reform absolutely has a profound impact on. Therefore, this paper makes a study on IPO efficiency of China's stock market from the unique institutional background based on equity separation reform.Above of all, this paper reviews the research results about IPO efficiency and finds that most of all directly use the western research paradigm of IPO efficiency, but neglect the other important part of IPO efficiency: IPO allocation efficiency. Therefore, referring to the idea of Dr. Zhao Maolin, this article has expanded the IPO efficiency, divides it into two levels: IPO allocation efficiency and IPO pricing efficiency, and thus structures the new IPO efficiency analysis framework. IPO allocation efficiency refers to the departure between the IPO price and the intrinsic value of the company. The departure is measured by how much information about the intrinsic value of the company the IPO price includes. If the IPO price includes more information, the allocation efficiency is higher, and vice versa. IPO pricing efficiency refers to the departure between IPO price and the closing price on the first day of listing company. That is to say, if issue price is closer to the closing price, the pricing efficiency is higher, and vice versa. The redefinition of IPO efficiency is not only to test the effect of equity separation reform, but also to find the root of high IPO underpricing rate in China's stock market: the low issue price in primary market or the over-react of investors in secondary market. And then this paper can put forward more targeted policy recommendations. On the basis, this paper based on the IPO data from Shanghai and Shenzhen stock markets: 132 shares from September 11, 2002 to September 9, 2004 which is sample A and 235 shares from June 19, 2006 to June 19, 2008 which is sample B, makes an empirical research. The first part of empirical research is the relation between equity separation reform and IPO allocation efficiency. This article selects issue price which is dependant variable and earnings per share, net assets per share and return on equity which are explanatory variables, and builds a multiple linear regression model. Through empirical research, this paper finds goodness-of-fit, level of signification and regression coefficient all suggest IPO allocation efficiency in domestic capital market has highly been improved since equity separation reform. The second part of empirical research is the relation between equity separation reform and IPO pricing efficiency. First, the paper makes descriptive statistics on IPO underpricing rate before-and-after equity separation reform and the results are that the average IPO underpricing rates before-and-after equity separation reform are respectively 79.01% and 145.24%, the median are 69.21% and 110.97%,and, the standard deviation are 59.95 and 106.11. This shows that IPO pricing efficiency has decreased since equity separation reform. There are maybe four reasons. The first is that the sample B is the stocks which are issued only two years after equity separation reform. The effect of equity separation reform is not fully apparent in such short time. Equity separation reform is good news in a long time, but the effect can appear only after other ancillary measures have been implemented, and this takes a long time. Second, equity separation is not the major reason for high IPO underpricing rate in domestic stock market. There are other reasons, for examples, distribution system, and distribution way and so on. Third, combining the first part of empirical research, we can see that the root of high IPO underpricing rate in domestic stock market lies in the secondary market. The last reason is the differences of the market before-and-after equity separation reform. The market before equity separation reform is a bear market, but the market after equity separation reform is a bull market. Then, the paper makes correlation analysis and regression analysis on the variables and finds that the goodness-of-fit before equity separation reform is better than that after equity separation reform, and the variables before equity separation reform which are qualified are more than those after equity separation reform. This paper holds that the reasons for such differences are: first, the impact factors have dramatically changed since equity separation reform. The explanatory power of the model turns weak. Second, the stocks listed in Shanghai market of sample A are more than those of sample B. Third, large companies of sample A are more than those of sample B. Meanwhile, this paper also finds: first, before equity separation reform, IPO pricing efficiency is negatively correlated with issue price, issue size and the market index on the first day of the company listing, and positively correlated with turnover rate on the first day of company listing, industry, and issue success rate. Second, after equity separation reform, IPO pricing efficiency is negatively correlated with issue price, issue size, industry, and positively correlated with market index on the first day of company listing, turnover rate on the first day of company listing and issue success rate.Through empirical research, the paper reached the following conclusion: the root of high IPO underpricing rate is not the low issue price in primary market, but the over-react of investors in secondary market. Therefore, it is important to take on a series of market-oriented reforms, but more important is to run on the secondary market. On this basis, this paper puts forward four-point proposal: the first is to further promote the market-oriented reforms about IPO distribution system. 1) Securities departments should strictly control the issue procedures to ensure that listing, the scarce resource, is allocated to the company of which the strength is competitive, the reputation is high and the future is bright. 2) Government should promulgate more severe laws to punish the managers who are out of duty. 3) The issue system should progressively advance to the registration system. The second is to further promote the market-oriented reforms about IPO distribution way. 1) We should improve the IPO pricing theory. 2) We should improve the process of IPO inquiring price. 3) We should culture underwriters and institutional investors. The third is to normalize and mature secondary market. We know the root of high IPO underpicing rate in China's stock market is the secondary market. If the secondary market is inefficient, any equity allocation mechanism is still in vain. Therefore, the key to IPO efficiency is to standardize the secondary market. The fourth is to promote the valuation investment and train long-term investors. In China, the purpose of investors is to earn more money, which is very easy to make stock price too high. Therefore, it is necessary to carry out education of securities knowledge and risk awareness to investors.