The Conditions Of Issue, The Industry Is Cyclical And The Ipo Underpricing

IPO underpricing refers to the investment return by which the closing price at the first day of IPO is higher than issuing price. According to Eugene Fama's Efficient Market Hypothesis, IPO underpricing is not feasible in an efficient market since IPO pricing can factor in all sets of information and makes adjustments to it. However, empirical studies show that the IPO underpricing phenomena broadly applies to virtually all the capital markets in the world, reflecting a fact that all the IPO markets, either in developed or underdeveloped countries, are somehow inefficient. Worth noting that IPO underpricing has been particularly prominent in China, as China tops in the world-wide ranking of stock market underpricing. This points to the extremely low efficiency in China's IPOs.The abnormally high IPO underpricing has long hurt Chinese companies' incentives of public listing, caused tremendous waste of capital in the sense that it attracted huge amount of profit-seeking funds, and aggregated the uncertainties for secondary market as well. Based on our assumptions and research findings, this literature presents unique understandings on China's IPO underpricing problem, while pointing out some feasible solutions for further improving the issuing institutions. From the angle of research methodologies, we not only provide an all-around review on China's issuing institutions, but also try to capture the relationship of issuing conditions, industry characteristics, and IPO underpricing in A-share market, by both theoretical reasoning, and empirical analysis.First and foremost, we believe that the unsound issuing institution is one of the most important factors playing behind the low IPO efficiency in A-share market. During the two decades since China's stock market was established, the stock issuing institution in China has witnessed a slow transition from plan-oriented to market-oriented, with still plenty of government controls or defects in the issuing institution nowadays. Hence no matter in the past or today, the unsound issuing institution has severely constraint IPO efficiency, and thus leads to tremendous IPO underpricing. This literature will take a deep dive into the background of China's issuing institution reform, and make detailed analysis on the institutional defects in various periods, which fueled the IPO underpricing bubbles. Meanwhile, we will provide in-depth insights on the existing issuing policies.Apart from the institutional factor, IPO underpricing could have been influenced by a couple of other issuing conditions, including but not limited to:the macro market environments, characteristics of respective industries, fundamentals of the company, or the choice of underwriters. This literature will provide proofs for how IPO underpricing could be affected by favorable public information n IB reputation and market environment, through the theoretical reasoning of Lotte Model, C-M Model and L-N-S Model. At the same time, we creatively extend the L-N-S Model by introducing the factor of industry cyclicality, while evidencing its possible impact on IPO underpricings in various industry groups. These, from a theoretical angle, have justified our attempts for relevant empirical studies in A-share market.Next, we select a sample of 242 stocks, which fall into representative cyclical and defensive industries, and have completed their IPOs during 1999-2011, exactly the same period when the market-oriented institutional reforms were initiated. Then, we let IPO underpricing be the dependant variable, and 5 selected issuing conditions be independent variables, conducting regular and ridge regression analysis one after another. Results reveal that the IPO underpricing in A-share market is somehow negatively correlated to issuing conditions such as PE (fundamentals), IB reputation and issue size.In Stage 2 of our empirical studies, we split the sample into two groups-cyclical and defensive, and repeat the regression analysis in Stage 1 for each of the groups. By comparing the results, we come up with a finding that IPO underpricing for cyclical group is more sensitive to market sentiment, which implies that the cyclical principle may also applies to the investment returns in primary market. Finally, after controlling other variables, the Reform in 2005 doesn't show negative correlation with IPO underpricing as expected, in neither of the two stages. It may imply that the reform in issuing institution hasn't reached its widely-expected targets, namely enhancing IPO efficiency.To end this dissertation, we give out our conclusions based on both our theoretical and empirical studies, and comment on the possible means to advance institutional reforms, and improve IPO efficiency.