The Comparison Of The IPO Underpricing Effect Between Before The Reform Of Non-tradable Shares And After The Reform Of Non-tradable Shares

IPO underpricing is a common phenomenon that exists in the global IPO market. As of now, IPO underpricing is still an unanswered question financial market. Academic researchers around the world have provided different explanations to this phenomenon from different angles. For China, the extent to which newly issued shares are underpriced is much higher than those in other countries. This also causes an mismatch between risks and returns in primary market and secondary market. As a result, capital are stuck mainly in the primary market, which have adversely affected the healthy development of the capital market. As such we felt it is necessary to analyze about the IPO underpricing in the Chinese stock market, to determine the major factors and reasons which drive the IPO underpricing, so that recommendations can be drawn accordingly.Many reasons lead to IPO underpricing. Most of these reasons are contextual upon different countries. Although researches have provided these reasons from different perspectives, a consistent and universal conclusion has not been reached yet. Therefore, researches with regard to the reasons for IPO underpricing in China is important and would give guidance future standard settings as well. According to the argument for this paper, major factors such as size of issuance, index of the market, transaction size of the market, volume of transaction and net capital return are chosen as reasons to explain the IPO underpricing based on previous researches. These factors are reanalyzed by considering other factors such as reform of non-tradable shares, overall liquidity of the market, total cost of the stocks, major shareholders percentage shareholding. By using the method of regression analysis in different period, similarities and differences of the IPO underpricing in each of the period are compared.Data before and after reform of non-tradable shares reform of non-tradable shares are selected. After the reform of non-tradable shares has started from June 2005, Chinese IPO market has been temporarily stopped to stabilize the overall stock market until June 2006 when based on the market value estimation, reform of non-tradable shares has almost been accomplished. Using June 2006 as a cut-off point, a set of 104 samples are selected from March 2004 to June 2006 whereas another set of 108 samples were selected from the period during March 2004 to June 2006. regression analysis are done to each set of data.The purpose of this paper concerns two major areas. Firstly, we are trying to identify whether or not factors causing the first-day underpricing have changed before and after the reform of non-tradable shares. We are also trying to explore the reasons if there are such changes. Secondly, based on these results, we try to discuss the development of the national capital market so as to whether it is heading towards a more efficient form or otherwise. We also believe that analyzing this development could reveal some phenomenon which is worth being thought of and hence offer some suggestions for standard settings.Lastly, we conclude that the capital market has transforming towards are more efficient form after the reform of non-tradable shares in general despite the fact that some holdbacks due to mechanism problem are still questing to be resolved as time passes by.