Intermediation Reputation And IPO Under-pricing

In the process of IPO, initial under-pricing is common abnormal phenomenon, which is called "the mystery of the primary market". IPO under-pricing refers to the phenomenon that on the first trading day of the initial public offering, the closing price is above the issue price. Scholars overseas have conducted vast researches on the phenomenon for decades, and have put forward many theories and hypothesis, of which there are mainly two explanations:unreasonable primary market IPO pricing based on effective market hypothesis, and second market over-reaction based on un-effective market hypothesis. But none of scholars’ empirical research completely supports a certain explanation. So far, IPO under-pricing is still one of the hotspot in finance, and more and more scholars devote in its theoretical and empirical researches.Compared with mature capital markets in the developed countries, the stock market in China is an emerging economic market, and the degree of IPO under-pricing is high and hardly falls down for a long time. The low-efficiency of the primary market reduces the financing amount on one hand, and leads to the serious imbalance between the primary market and the second market on the other hand. Because of the serious imbalance between supply and demand of new shares in China’s capital market, the subscription of new shares has been considered to be risk-free investment, which leads to long-term presence of a large number of idle funds in the primary market for "new shares" and causes funds idle. This has seriously affected the healthy development of the stock market.Study finds that IPO under-pricing is affected by many factors. Intermediation reputation including underwriter reputation and auditor reputation is one of the important factors. The prestigious intermediaries can provide more accurate information disclosure and reduce the information asymmetry between issuers and investors. Meanwhile, prestigious intermediaries have a wealth of experience and expertise and their offering price is closer to the true value of the new share. For quality companies, they also tend to employ prestigious intermediaries to convey good news to the public, thereby increasing the offering pricing and reducing the under-pricing. In other words, the intermediary reputation and the rate of IPO under-pricing is negatively correlated. However, in China’s securities market, the efficiency is not high enough, the degree of marketization of IPO pricing is not high, relevant law and regulations are not perfect, which lead to the relationship between the intermediary reputation and IPO under-pricing is not obvious in China. Since2005, the inquiry mechanism is carried out in China, which is a milestone in the process of promoting the marketization of IPO pricing. Against this background, this paper will have research on the relationship of IPO under-pricing and the intermediary reputation, and expects a positive conclusion.This paper is divided into six chapters, each chapter follows:Chapter1ExordiumThis chapter first introduces the background and significance of this paper, followed the ideas and framework of research are described. In the end of the chapter, the research method of the paper is pointed out.Chapter2Literature ReviewThis chapter first reviews the literature about the two hypotheses based on "information asymmetry theory" and "signal theory", mainly about the foreign literature. Secondly, this chapter reviews the literature both foreign and domestic about "the relation between underwriter reputation and IPO under-pricing" Foreign scholars’research on this field basically reaches the same conclusion that they are negatively correlated. This is mainly because, after several hundred years’ development the securities markets of developed countries have been basically mature. The mature of IPO system and market regulatory system guarantee the effectiveness of the primary market. The research of the field in the domestic started late, the current literature focused on the empirical test before2006, but concluded not entirely consistent so far. Finally, this chapter reviews the literature both foreign and domestic about "the relation between auditor reputation and IPO under-pricing". Foreign scholars’research on the field basically reaches the same conclusion that they are negatively correlated. However, most scholars in the domestic reach the conclusion that the auditor reputation and IPO under-pricing don’t have a significant correlation. The literature suggests that the hypothesis of intermediary reputation isn’t established before the inquiry mechanism in China.Chapter3Theoretical AnalysisThis chapter first defines the intermediary reputation and IPO under-pricing, and introduces their measure methods. As the core concept of the paper, under-pricing is described in detail. The difference between "under-pricing" and "overpricing" and "excess returns in the first day" is highlighted. Secondly, this chapter reviews the theoretical basis that the research relies on including "the information asymmetry theory" and "signal theory". In the end, the paper analyzes the correlation between the intermediary reputation and IPO under-pricing.Chapter4Research DesignThis chapter first makes three assumptions about "the correlation between the underwriter reputation and IPO under-pricing","the correlation between the auditor reputation and IPO under-pricing" and "the correlation between the united reputation and IPO under-pricing". Secondly, this chapter sets the experimental and control variables including underwriter reputation, auditor reputation, united reputation, the size of IPO issue, price-earnings ratio, success rate in the online issue, the turnover in the first day, time between the establishment and the listing, and the return on net assets. Then, the chapter constructs three models to test the above three assumptions. Finally, this chapter describes the sample and data that empirical research uses.Chapter5Empirical TestEmpirical test in this paper includes descriptive statistics, correlation analysis and multiple regressions.This chapter first makes an empirical test based on all A-share data and finds that the auditor reputation has significant effect on the IPO under-pricing, the underwriter reputation has no significant effect on the IPO under-pricing, and the united reputation has significant effect on the IPO under-pricing.Secondly, the chapter makes empirical tests based on data in different sections. The result from the motherboard and the small and medium enterprise board is similar with the result based on all A-share data. However, the result based on the growth enterprise market shows that the underwriter reputation or auditor reputation has no significant effect on IPO under-pricing, but the united reputation has significant effect on IPO under-pricing. This means that compared with a single signal such as underwriter reputation or auditor reputation, the united signal can play a more significant role.Chapter6Conclusions, Policy Recommendations and Ideas for ImprovementFirstly, based on theoretical analysis and empirical results, the chapter reaches the final conclusions of this paper. Secondly, based on the final conclusion of this paper, this chapter makes the policy recommendations as follow:①Cultivating high-quality underwriter group and promoting the form of underwriter reputation mechanism.②Improving the pricing mechanism further and the rationality of the IPO pricing.③Promoting the reform of the secondary market and standardizing the investment behavior.④Improving the Growth Enterprise Market and preventing speculative bubbles. Finally, the chapter made ideas for further improvements of this paper.The main contributions of this paper are:First, the paper expands the perspective on the study of intermediary reputation. Compared with the previous literature only focusing on the underwriter reputation or auditor reputation, the paper not only studies the impact that underwriter reputation or auditor reputation has on IPO under-pricing, but also studies the impact that united reputation has on IPO under-pricing. This makes the research content have some novelty and forward-looking.Secondly, the paper improves research methods. The paper studies not only the impact that intermediary reputation has on IPO under-pricing based on all A-share data, but also the impact that intermediary reputation has on IPO under-pricing based on different sections. It is different from the previous literature.