Empirical Research And Analysis On China’s IPO Pricing Market

IPO underpricing and long-term underperform of IPO arewidespread worldwide especially in China’s stock market. The analysis ofinfluencing factors on IPO underpricing and long-term underperform of IPOcould not only test if these western theory can be used to explain theirrational behavior of the Chinese IPO market, but also help to improve IPOefficiency and to optimize resource allocation of capital markets.After the literature review of existing academic study, the studymade a summary of the development of China’s IPO market, especially theregulatory mechanism and the pricing mechanism of IPO. Based on theabove analysis, the empirical research decided to use the data of companieslisted after the implementation of the IPO book-building mechanism in2005.The research tried to find out the influencing factors of IPO underpricing. Inaddition, based on the comparison of two measures on IPO long-termperformance, the study decided to use BHAR as a more accurate method todescribe the long-term excess return of new shares as well as the relationship between the amplitude of the new shares on the first day ofunderpricing.According to the empirical results:(1) The abnormal first-dayreturn of new shares was60%in China during2005-2012, significantlyhigher than that of most of the developed markets. Major influencing factorsinclude market sentiment, first-day turnover, bidding rate, adjusted net bookvalue per share, PE ratio, the ratio of shares outstanding and the number ofshares issued. Western academia for the IPO underpricing phenomenon ofasymmetric information theory as well as the reputation of the underwriterstheory and did not get a good validation in the IPO market, the secondarymarket for speculative mood is one of the main reasons of the new shares onthe first day of high underpricing.(2) There exists the phenomenon that IPOlong-term performance is negatively related with first-day return. As result,the analysis of IPO long-term underperformance should put more focus onthe reasons causing IPO abnormal initial return on the first day. On the otherhand, the high issue price and the secondary market irrational speculationare other reasons for the long-term underperformance.