Underwriter Reputation Mechanism Issue In China's Stock Market Validation Study

This paper endeavors to apply the lead underwriter reputation model (LURM) for IPO underpricing to the primary market for securities in China in order to test the explaining power of the LURM in the domestic primary market. We also try to propose that the LURM demonstrates greater and greater explaining power in China as the primary market gets more and more institutionalized.There are two potential theoretical issues associated with the application of the LURM. First, does the LURM boast universal explaining power? This has direct implication for whether our research makes practical sense. Second, the regulations for issuance of stocks in China have been subject to frequent revisions at short intervals. Hence a problem arises that whether the LURM is capable of providing plausible explanations for IPO underpricing under different regulations.For the first issue, a feasible solution is to run the LURM based on data from primary markets in advanced countries. This paper looks into the operating data from advanced countries from different perspectives with reference to existing research results, thus providing evidence for the universal explaining power of the LURM.For the second issue, we follow a multi-stage approach. We divide the regulations for issuance of stocks in China into three categories, i.e., the approval regime, the review regime and the current sponsoring regime. We then apply the LURM under these different regimes. Our study shows that in the early stage of our primary market, the LURM is basically incapable of explaining IPO underpricing; however, as the primary market becomes more and more institutionalized, the LURM tends to hold.