Correlation Study Of Auditor Reputation And IPO Underpricing

IPOs are short for initial public offerings. When a company, incorporated or limited liability, raises capital by offering stocks to the public for the first time, this stock issuing is called IPOs. IPOs of firms’stocks have been presented to be underpriced. On the first trading day of the IPOs’stocks, the degree of premium is measured by IPOs’premium ratio, the difference between closing price and offering price dividing by offering price. The phenomenon of IPO’s underpricing exists vastly in every stock market in all countries. On the average of the world, IPOs’underpricing ratio gets 30%, and in our country, the ratio is much higher. This phenomenon attracts lots of attention in the world, and many factors may cause the IPOs’underpricing. There are some popular theories, such as winner’s curse, market feedback hypothesis, investment bank monopoly hypothesis, signal hypothesis,. ownership dispersion hypothesis, agency costs hypothesis, signal delivery hypothesis, ownership dispersion and ownership concentration hypothesis etc.First, this paper summarizes the concept and field of research, and then poses the question about the relation between auditor’s reputation and IPOs’ underpricing. Firstly, according to the agency organization reputation theory, if reputation of the agency organization is in a high grade, there will be more brokers and investors pay attention to the firms’IPOs, therefore, the firm should be cautious about the releasing of accounting information and paper of prospectus to make sure that they are in high quality. According to the way of asymmetric information, the firm of IPOs would like to transmit real information about the company to investors, and in order to enhance the paper of prospectus, the firm carries on some strategies, for instance, making private information publicly. The effect, originated form employing agency institution of high reputation, makes investors believe that the IPOs’firm is of booming futures, and therefore, buy the company’s stocks. Auditor for the IPOs is also agency institution. In order to boom sells of stocks, the IPOs’firm will select high reputation auditors. This can deliver a message to investors that accounting information and balance-sheet are real and in high quality, as the signal delivery theory says.This paper divides reputation of auditors into four segments, the famous four international accounting firms, international accounting firms except for the four, top ten domestic accounting firms and non-top ten domestic accounting firms. Explained variable for multiple regression is IPOs’underpricing ratio, and explanatory variables are auditors’reputation, a dummy variable having 1 or 0 values, main underwriters’reputation, reciprocal of offering price, size of offering, operational efficiency, logarithms value of total assets, net earning per share etc.This paper studies on IPOs in A stock market by empirical methods. I divided full sample into two segments A and B. Sample A, from 1992 to 2009, includes 461 firms,but 367 firms are left for the study, after excluding financial companies and firms without data. The B part includes 529 firms of small or medium size, after excluding financial companies and firms of missing data, only 483 firms. Then split sample A into two subsamples by whether the firm is owned by state or not.This paper describes explained variables, explanatory variables and their sources and structures. Before data analysis, each variable in each sample are described by maximum, minimum, mean etc.The main results are summarized as follows:In sample A, state-owned companies’sample and small-medium firms’sample, three regressions confirm that auditors’reputation and IPOs’underpricing have strong negative relations.That is identical to hypothesis 1, hypothesis 2, hypothesis 4, as I expected. In IPOs, employing auditors in high reputation can substantially decline the IPOs’ underpricing. The results make a point that agency institutions’reputation can be used in domestic security market. Unfortunately, however, there is not distinctive relation between IPOs’underpricing and auditors’reputation. Maybe that is caused by small amount of sample firms or other underlying variables missed in my study.Finally, I analyzed the results to explain why they are distinctively negative related or why not. By doing so, I posed some suggestions:strengthening management of auditors, improving the environment of auditors and accounting firms, encouraging cooperations between the top four and domestic accounting firms, reforming management structure of list firms, institutionalizing IPOs’ market etc.