The Impacts Of VCs Affiliated To Underwriters On IPO Underpricing

VCs affiliated to underwriters, also called Direct Investment, once formed, have an advantage over other non-underwriter-backed VCs, that they can choose those companies of the biggest possibility to get the approval from Issuance Examination Committee of CSRC, who are the underwriter’s clients, to ensure the investments exit through IPO with large probability. This kind of profit model is institutional arbitraging, obtain the price spread between the primary market and the secondary market. In market of high information asymmetry, the underwriter’s dual role may bring conflicts of interest, then rational underpricing arises.Results of existing researches on this issue is by no means abundoned, they all agree that the existence of VCs affiliated to underwriters have no significant influence on IPO underpricing. Through theoretical derivation, this paper found the defects of the literature on their research methods, they don’t attach great importance to information asymmetry, because of which the conflicts of interests appear, and they don’t divide the samples into different groups according to the levels of information asymmetry in different boards, this results in inaccurate conclusions. This paper distinguish the level of information asymmetry of different boards, on board of high level information asymmetry, for example the GEM (growth enterprise market), direct investment bring conflicts of interest, then rational underpricing arise and first-day yields of IPOs increase.This paper analyzes the influence of direct investment on IPO underpricing through theoretical deduction and empirical test. This paper takes641samples from newly issued A shares in China, range from July2009to Nov2012, then divides the samples into two groups according to different levels of information asymmetry.This paper starts from the various theories about IPO underpricing, and then discusses the applicability concerning direct investment. The development of direct investment and progress of China’s issuing mechanism reform are also discussed, which give insights into the behavior of VCs affiliated to underwriters and their impacts on underpricing of A share. We then find that grouping according to information asymmetry is the critical point, and put forward the researching hypotheses, finally we use multiple linear regression method to test these hypotheses.The empirical studies reaches the following findings.First of all, this paper finds that the first thing need to do is analyzing the information asymmetry level of the market the IPO company in, and classify the samples according to the different levels, then study the impacts of direct investment respectively, or the research won’t get appropriate results.Secondly, this study finds that direct-investment-backed IPOs listed in Main Board and SEM Board, means of lower level of information asymmetry, do not suffering higher underpricing nor lower underpricing, that means direct investment does not have significant influence on IPO performance. The reason is that, the period between Purchase to Exist is short, the VCs affiliated to underwriters do not provide any value-added service to issuers, and low level Information asymmetry gives few opportunity to underwriters to whitewash the prospects. There is no "Certification Effect" nor "Rational Underpricing".Third, this paper finds that direct-investment-backed IPOs listed in the GEM (Growth Enterprise Market), means of higher level of information asymmetry, suffering higher underpricing. The underwriters have the motivation to select information in favor of the issuer, and put it in the prospects, trying to pricing shares of stock higher. Then conflicts of interest arise, higher underpricing observed.