Rationalization Of Ipo Pricing

Successful IPO (Initial Public Offer) is one of the best ways to collect necessary capital publicly, to distribute the operation risk and to improve the capital structure. The reasonable pricing of IPO is principal to issue of IPO. In China, the popular problem is the underpricing of IPO. The writer hereby means to figure out a way to pricing IPO reasonably through illustration of IPO in international markets and discussion on the experience of our own market. The whole thesis includes four parts as below:There are primary theories on the IPO pricing in the first part. The price of IPO is determined not only by the way to calculate its basic value but also by the systems to issue them. So most popular ways to calculate its basic value such as DDM, DCF, P/E, NVA are mentioned in the first chapter. Next, the author introduces the main systems to issue IPO including Fixed Price, Auction, Book-building, and Mix of the formers. Also the policy on new issues, the capability of traders and the extent of development of stock market are brought out as the ingredients to choose the fitful issue systems.In the second chapter, the arguer turns to the comparison and analysis of the ways to issue IPO in foreign markets. Some theories on the causes of underpricing and main systems in developed countries and in new emerging market to issue IPO are introduced and analyzed separately. The different systems have different advantages and should be applied in different backgrounds. Finally, the writer mentioned the development in auxiliary tools and tendency of IPO issue in recent years.Analysis on IPO in China is brought forward in the third chapter. Underpricing of IPO in China is so heavy that it doesn't only make the price abnormal high, but also upset the balance between the issue market and the transaction market, which lead to the deterioration in allocation the financial resource. Although great efforts have been paid to modulate the price of IPO, the underwriters in China failed to get a fitful system to price IPO. The reasons come from the interference on issue market by government, the abnormal price level in transaction market, the oversimplicity in the ways to discover the price of IPO, and the scarcity of standardization in operation. All these factors lead to low efficiency on issues of IPO. Finally, from all the discussion above, the author gives a proposal on solving the problem of IPO pricing. First, the "untradable" stocks should be changed to be tradable ones. Second, government should help to establish a system to supervise the operation in the market but not the government should act as managers in the securities market. Third, both issue market and transaction market should be standardized at the international criteria. After the normalization of the market, the underwriter should choose the mix of auction and fixed price regime as the best way to price IPO. Of course, they also need to pay enough attention to some auxiliary tools to help them modulate pricing of IPO in the whole process.