The Efficiency Of Book-building Mechanism In Chinese IPO Market

This research studies the efficiency of IPO pricing mechanims in China. A sample of 709 IPOs was collected between 1 January 2001 and 31 December 2009 in China. During 2001-2004 when Fixed Price Offerings (FPO) was used as a pricing mechanism, 300 IPOs, 42.31% of all IPOs, are listed. In the next period from 2005 to 2009, a set of 409 IPOs, which makes up 57.69%, is priced by a new method namely Book-Building (BB).Efficiency of the current IPO pricing mechanism in China is evaluated by analyzing the data listed during the 2001-2009 period. Two research questions answered in this paper are 1) whether the current pricing mechanism of BB is more efficient than the previous one– the FPO; and 2) why the BB mechanism is more efficient or less efficient in China. For all the period of 2001-2009, the average underpricing of IPOs is 108.87%.However, the overall empirical evidence proves that the new IPO pricing mechanism of BB has not reduced underpricing level in China as expected. After the BB method was introduced (the post-BB period) the average underpricing level of Chinese IPOs is 116.95%, which is higher than an average of 97.84% underpricing level for IPOs issued during the FPO period (the pre-BB period).The reasons why the BB mechanism is less efficient in China are because of external reasons related to information asymmetry of firm quality and ex-ante uncertainty as well as investor's optimistic toward controlling proxies of market conditions'effect. To be more particular, this paper found that: i) Some firm quality proxies'effect on underpricing is still tight even after the BB was introduced. In addition to this, some ex-ante uncertainty proxies like the ratio of Offer Price over Earnings Per Share before offering (PRIEPS) affect on the underpricing level stronger post-BB. This means that the transparent information of the BB method has not reduced other external effects. ii) High quality underwriters invited in the BB procedure are considered as a signal of―hot issue‖, which could result in higher underpricing levels as investors on secondary market often keep an eye on institutions'actions. However, in fact, after the BB was used, higher quality underwriters did not raise the underpricing level on Shanghai Stock Exchange (SHSE) and it only has a positive affect on Shenzhen Stock Exchange (SZSE) but not significant. iii) In the post-BB period, higher percentage of offer price range settled in a preliminary BB process (PRIRANGE) and higher percentage adjustment of final offer price from the expected offer price (PRIADJUST) in a preliminary BB process did not associate with higher underpricing level. The possible reason is that underwriters tend to over-adjust on offer price after collecting information from the BB process. If the information is good, a higher price adjustment helps underpricing decrease, otherwise one lower adjustment causes underpricing increase.