The Study On Investment Bank Reputation And Long-term Financial Performance,Long-term Investment Return

The china security market has been developed for more than20years and it is a very important market to help enterprises finance directly and it provides a channel for most market investors. However, since security market in China started comparatively late, it still fell behind other developed countries. As the number of enterprises and investors is accumulating, the scale of Chinese security market is expanding. Chinese security market needs to improve and realize the optimization of resources. Thus, it is necessary to carry a research into the Chinese security market. The function of security market is to make better use of capital, but the involvers in the market, as public enterprises and investors have problems of information asymmetry. In theory, the rising of financing media, Investment banks can lighten this problem. However, only an effective mechanism in the capital market can guarantee underwriters playing their use in capital market and that is exact the topic of this paper.The main purpose of the paper is to test whether investment bank reputation mechanism exists and whether information asymmetry in security market can be eliminated, based on previous theories and research results about investment bank reputation mechanism. Specifically, this paper would first test whether investment bank reputation mechanism would help investors distinguish the value of companies, for example, whether companies which go to public can choose investment banks which have good reputation to convey positive information to attract the investors. Based on the purpose of this research, the paper adopted the A shares issuing on Chinese stock markets (Shanghai&Shenzhen), doing empirical research on the relationship of these companies’financial performance, long-term investment return, and investment banking reputation3years after IPO. And then make it clear of the relationship between investment banking reputation and financial performance, also the relationship between investment banking reputation,long term financial performance and IPO long-term return. If positive correlation exists between them, then this will provide IPO companies and investors with a meaningful reference. Issuer can send a signal to investors by choosing the investment bank, and also, investors could use the investment bank reputation to identify the pros and cons of the proposed listed company, which will reduce the risks and costs of the transaction parties. However, if they are not positively related, it would indicate that the relationship between reputation mechanism of investment and performance of companies doesn’t work in our country. Regarding to the reasons behind ineffectiveness, the paper would propose suggestions towards market policies to better the capital market environment in China.Through the empirical study and static tests towards274samples from2001to2008,this paper draw some conclusions about relationship between reputation of investment banks and quality index for Chinese IPO company.First, through the regression analysis towards overall samples, no matter whether PE ratio or reputation weight is controlled or not, we discovered that the positive relationship between the reputation of investment banks and long term financial performance doesn’t exist. This result is different from the presumption1; The positive relationship between reputation of investment bank and long term investment return doesn’t exist either. However some financial indexes of public companies such as ROA are positively related to long term investment return and this result is identified with assumption2.Second,we find whether the market trend is up or down, and whether enterprises are state-owned or not, the regression results are almost the same, which means that the positive relationship between reputation of underwriters and long time investment return doesn’t exist and the reputation mechanisms of investment banks are ineffective.Third,taking sponsor system into consideration, we find after the execution of sponsor system, the variable, reputation of underwriters, which is estimated by the number of underwriter has positive relationship with long term performance and return of companies. This phenomena indicates that after execution of sponsor system, reputation of underwriter has positive relationship with long term return of IPO companies and that is indentified with theory. This result is the same with assumption3and in some degree, it proves the effectiveness of investment banks reputation after the practice of sponsor system.Regarding relative theories and empirical studies, this paper discovers that investment bank reputation mechanism in some extent, doesn’t work. Combining the current situation of Chinese security market, this paper finds out there are three reasons behind the ineffectiveness of investment bank reputation. Firstly, the current situation of Chinese security market doesn’t meet the necessary condition under which investment banks will play role in producing and conveying information of companies; Secondly, there are market barriers for underwriters. Third, the issuing system of stock is not feasible. Fourth, China lacks punishment system towards illegal action of investment banks. In order to change the ineffectiveness of reputation mechanism, we consider the following methods. First, relax the supervision of investment banks. Second, promote reformation of stock issuing system’s mercerization. Third, speed up the establishment of investment banks files in order to provide the evidence to punish their illegal action.