A Study On The Influence Of Chinese Investment Banks' Reputation On IPOs Underpricing

IPOs underpricing is one of "three IPOs Puzzles" (IPOs underpricing, IPOs underperformance and Hot Market) and it is widely researched by academics in this area. The academics find many factors which affect IPOs underpricing and analyze the reasons of IPOs underpricing phenomenon from different perspectives, one of which is investment banks'reputation. Studies concerning investment banks' reputation in western countries'mature financial market present the negative relationship between investment banks'reputation and the level of IPOs underpricing. The reason for this relationship lies in the function of investment banks'role of the "information producer" and "certification intermediation" in the process of IPOs. In the mature capital market, the clear structure of property rights makes investment banks responsible for the success or failure of the stocks they underwrite, thus bad performance of underwriting will negatively influence investment banks'long-term profitability. Thereafter, good reputation will incentivize and constrict the behavior of investment banks, strengthen investors'confidence, so that ensures the creditability of the information produced by investment banks and improves the efficiency of resources allocation.Since the results of western research are based on mature capital market, they can not completely illustrate the IPOs pricing phenomenon in newly-rising markets such as China. Thus the paper investigates the relationship between underwriters' reputation and the level of IPOs underpricing according to China's special IPOs' institutional environment and different stages of capital market development.In the first place, we review the literature on investment banks'reputation and IPOs underpricing phenomenon, the concept and formation of reputation, and the changes of the IPOs institutional environment. Depending on such review, we find the institutional environment is intended to obtain the features of "market economy" and the IPOs market is being liberalized. In the second place, we use three game theory models to demonstrate the formation and function of investment banks'reputation, the static effect of investment banks'reputation on IPOs underpricing and the dynamic influence of investment banks'reputation on IPOs underpricing. Finally, we select 1792 stocks in China's A-stock market from 1991 to Aug.31st 2010 to empirically test the relation between the reputation of underwriters and IPOs underpricing.The result shows that following the procedure of the IPOs institutional change from "plan economy" to "market economy", investment banks'reputation gradually takes effect on IPOs underpricing with statistical significance. The establishment of reputation mechanism will make the capital market more efficient.